CLIMATE CHANGE AGREEMENTS ADJUDICATION SERVICE

Background to the Climate Change Agreements

The climate change levy came into effect in the UK from 1^st April 2001 and applies to all but the smallest energy users in the non-domestic sector. It affects supplies of electricity, gas, coal and liquefied petroleum gas. This follows the recommendations made in Lord Marshall’s report Economic Instruments and Business Use of Energy published in October 1998. The legislation governing the levy is contained in section 30 and schedules 6 and 7 to the Finance Act 2000.

The Government has recognised the need for special consideration to be given to energy intensive business sectors in view of their energy usage, environmental protection requirements (based on the EU Integrated Pollution Prevention and Control Directive) and their exposure to international competition. The Government has provided an 80% discount from the levy for those business sectors that can agree challenging targets for improving their energy efficiency or reducing carbon emissions. Consequently, companies operating energy intensive processes are eligible to enter into 12 year Climate Change Agreements (CCAs) with the Government.

There are ten major energy intensive sectors (aluminium, cement, ceramics, chemicals, food & drink, foundries, glass, non-ferrous metals, paper, and steel) and thirty smaller sectors. Agreements have been negotiated by the Department for the Environment, Food and Rural Affairs (DEFRA), on behalf of the Government, with the relevant sector associations (on behalf of the companies within the sectors concerned). There are currently 44 CCAs that cover around 5,500 companies and approximately 12,700 UK “facilities” (sites). The agreements are administered by DEFRA.

CCAs have been made at two levels. First, with bodies which represent relevant business sectors (sector associations) and, second, with companies operating eligible facilities. These agreements are known as `umbrella agreements’ and ‘underlying agreements’, respectively, and (broadly) follow a standard format. All umbrella agreements are made between the Secretary of State for the Environment, Food and Rural Affairs and sector associations. Most underlying agreements have been made between the Secretary of State and participating cases but in six cases (“Option 3 Agreements”) the underlying agreements are between the sector associations and the companies concerned, approved by the Secretary of State. There is no practical difference in the operation of the two types of agreement.

Each industry sector has a target to meet, as does each participating business. In both cases, agreements extend for a twelve-year period, divided into two-year stages, and there are intermediate targets to be met at the end of each of these “milestone” periods. Target performance is assessed by DEFRA before the start of each new period (1^st April 2003, 1^st April 2005, etc). Targets take the form of absolute savings of carbon (via carbon dioxide emissions) or energy, or are expressed in terms of relative carbon or energy (i.e. amount of carbon or energy per unit output). Underlying agreements cover a “target unit”, which may be a single facility or a number of facilities (usually on separate sites) operated by the company in question. In the latter case, performance by the various facilities is aggregated.

In assessing target performance, DEFRA will examine consolidated sector data for a one year period (1^st October – 30^th September or 1^st January – 31^st December). If the sector meets its target, then all participating facilities will be re-certified for 80% discount from the levy. If the sector fails to meet its target, then DEFRA will examine individual facility performance. In this case, facilities which fail to meet their targets will not be re-certified to receive levy discount. However, they will remain in the agreement and may be re-certified if they have caught up with their target performance profile before the next re-certification point.

Electronic versions of the 44 umbrella agreements may be found on DEFRA’s CCA web-site: www.defra.gov.uk/environment/ccl/index.htm under the heading “Umbrella Agreements”.  Underlying agreements are not published, but a pro-forma underlying agreement (reference PP3.02) can be found at the same web-site under the headings “Climate Change Agreements Process/PP Series”. 

Adjudication Service

The agreements make provision for adjudication in cases of a dispute on questions of fact, as set out in schedule 5 to the umbrella agreements. Also, schedule 5 to the underlying agreements provides for adjudication in the following circumstances:

(i) failure by the parties to agree on the exclusion of a facility from an underlying agreement (e.g. if it ceases to be a facility);

(ii) variation of the targets within an underlying agreement as a result of the exclusion of a facility;

(iii) failure to agree on variation of absolute targets for a target unit following decline in output below 90% level.

In these cases, the agreements allow a person who wishes to seek adjudication to refer the dispute to an Adjudication Service set up specifically to support the agreements.  The service is administered by the Chartered Institute of Arbitrators, (CIArb), and was established with involvement from a number of professional bodies including the Institute of Energy, the Institute of Materials, Minerals and Mining, the Institution of Civil Engineers and the Institution of Electrical Engineers. 

There are minimum standards for appointed adjudicators to achieve, which include completing a training programme and passing an interview to determine an individual’s suitability to provide adjudication services. Minimum standards for adjudicators require that only experienced professionals will be eligible to provide the service. The mandatory training course is operated by the CIArb at regular intervals and the network of adjudicators keep in touch with each other to ensure best practice is deployed in the interests of all stakeholders.

The CIArb appoints an adjudicator at the request of the parties and charges an administration fee to do so. Adjudicators set their own fees for providing the service to be agreed by the appointing parties to the dispute.

An adjudication is carried out expediently and with care to ensure an efficient and cost effective service to the parties. The outcome of any adjudication process will not necessarily be binding on the Secretary of State. At the end of this process, there may be cases where the Secretary of State and an operator continue to take a different view and the operator may decide to challenge the Secretary of State’s decision in the courts through the judicial review procedure.

Enquiries about the CCA process in relation to adjudication should be directed to Duncan Egerton at DEFRA’s Climate Change Agreements branch, telephone: 0207 944 4822; E-mail: Duncan.Egerton@defra.gsi.gov.uk.  Those wishing to enquire about requesting appointments from the adjudication service should contact Abigail Jennings at the Chartered Institute of Arbitrators, International Arbitration & Mediation Centre, 12 Bloomsbury Square, London WC1A 2LP. Telephone 020 7421 7447, fax: 020 7404 4023 or e-mail: ajennings@arbitrators.org.