Exclusive: Private equity raises carbon reporting fears

Private equity firms are to express concerns to the government that the introduction of the carbon reduction commitment (CRC) emissions trading scheme next year could land them with a disproportionately large bill and huge regulatory burden.

The Department of Energy and Climate Change (DECC) is currently consulting on draft CRC regulations that would require 5,000 UK businesses that use over 6,000MWh of electricity a year to comply with a carbon cap or buy in carbon allowances to cover any emissions exceeding that cap.

The scheme is intended to target large emitters not covered by the EU emissions trading scheme (ETS), such as supermarkets, hotels, universities and hospitals, and as a result requires firms to report on emissions from right across their activities rather than from individual sites.

Private equity firms are now fearful that under the regulations they will be classified as a parent company and will be made responsible for the carbon emissions from all the businesses in their portfolio, even if individually those businesses would not use enough electricity to qualify for the scheme.

"This is all very well for a normal company group, in which the parent company can reallocate resources from one part of the group to another, but it does not take into account the structure of investment funds, and the fact that they cannot reallocate resources," said Angus Evers, head of law firm SJ Berwin's Environment Group in a briefing note.

The private equity industry maintains that it is supportive of the CRC in principle, but believes it will be disproportionately impacted by the scheme and will face a huge administrative headache attempting to gauge the carbon footprint of many different companies that under alternative ownership structures would be deemed too small to qualify for the scheme.

"The structure of private equity ownership, where a single fund is the ultimate owner of a disparate group of companies often ranging in size and industry focus, does not fit neatly into the definition of a 'group' as proposed under the CRC," said a spokesman for industry body the British Venture Capital Association. " If the company is not consolidated into the balance sheet of the manager it should be viewed as independent."

The industry is expected to make its concerns clear to the government during the current consultation, but insiders are sceptical that significant changes will result, particularly given that the inclusion of private equity groups within the scheme would only help achieve the CRC's stated aim of expanding the number of companies required to monitor, manage and reduce their carbon emissions.

DECC is to publish a user guide on the CRC in the next two weeks.

However, a spokesman for DECC hinted that private equity groups were unlikely to be excluded from the scheme.

"The parent group that a company is officially registered with will be responsible for their emissions – we're talking about large consortiums here who are collectively responsible for high energy use," he said.