Law firms risk large fines from new carbon trading requirements

Expert comment by Ben Wielgus, KPMG

From April 2010 the Carbon Reduction Commitment (CRC) will impact 5,000 UK private and public sector organisations. Those who prepare early have the opportunity to gain competitive advantage in terms of managing cost and reputational impact, as well as having greater confidence in their purchase of carbon allowances and reducing associated risks.

What impact will it have on the legal sector?

Some larger legal firms will cross the 6,000MWh threshold but of more importance for many professional services firms will be the impact on their clients and the opportunities this may present to support them in addressing the new challenges.

For many legal firms, they won’t meet the usage thresholds to qualify for the scheme, although any firm paying for electricity through a HHM will have to register with the government scheme and provide evidence whether they are in the scheme or not. The major impact for many professional services firms will be the impact on their clients and the opportunities this may present to support them in addressing the new challenges.

What legal issues may this present?

The CRC presents cash flow, bottom line and reputational risks for any organisation that falls within the boundaries of the scheme. It will require new systems and new skillsets to avoid the risks and turn them into opportunities to save, and even make, money.

In the legal arena, the CRC adds significant urgency to the debate around so called ‘green’ or ‘ethical’ leases. These can include clauses covering issues as varied as the energy efficiency of buildings to the treatment of cleaning staff. Under the CRC, the party named on the energy supply contract is responsible for the associated carbon emissions. In particular, this causes significant issues for landlords / tenants as neither has full control over the carbon efficiency of buildings and neither is likely to be keen to pay for the carbon without that control. This is made more challenging with the removal of a proposal in earlier CRC consultations that allowed the responsibility for the carbon to be passed from landlord to tenant where both parties agreed to the action.

Now:

• landlords of serviced offices will want to be able to pass on costs of carbon to their tenants but some leases may not allow this. There will also be considerable complexity around repayment of any refunds where tenants have moved on or where some tenants have performed better than others. Furthermore, when landlords have limited influence on the energy usage of their tenants, their performance in the CRC can be influenced by a small number of poorly performing clients.
• tenants in serviced offices, when the cost of carbon is recharged, will pay for a carbon at a price determined by the performance of the landlord’s whole portfolio and this is often considerably out of their ability to influence.

Both landlords and all of their tenants will need to work together to be able to take advantage of the opportunities from the CRC or incur reputational and significant cost implications, particularly once the costs of carbon ramp up in later years. For those that can’t work together effectively, one (or both) parties will want protection from the cost implications of any failure to act. Enter the lawyers…

Ben Wielgus, Lead CRC Advisor, KPMG Carbon Advisory Group