Environmental issues for business
Published : July 2008
The rapid growth of environmental law and policy in the UK may be welcome by environmental lawyers, but it can be something of a headache for businesses. Simon Triggs and Robert Tilling untangle the latest legislation
Reams of new legislation and policy initiatives have emerged at national and European level over the last few years and it can be difficult for directors to keep up with the changes. Although some environmental issues can be delegated to environmental managers, the green agenda is becoming more important to business, and many emerging environmental laws can have a significant impact on profits, so it is increasingly important for environmental issues to be addressed at boardroom level. In this article we highlight three emerging environmental issues that directors and senior managers should be aware of.
REACH: THE NEW REGIME FOR CHEMICAL SUBSTANCE REGULATION
The REACH regulation is a new European regime for the regulation of all substances that are placed on the European market. REACH stands for Registration, Evaluation, Authorisation and Restriction of Chemical substances.
The new regime has arisen from concerns that there are tens of thousands of chemical substances already on the European market about which very little is known. Although there has been a regime for testing new chemicals placed onto the market since 1981, this only represents a very small fraction of all chemical substances in existence. The regime requires all substances sold on the European market to be tested and then registered with the new European Chemicals Agency in Helsinki.
At first glance, this new regime might be dismissed as just more regulation for the chemical and pharmaceutical industries. However, REACH applies to ‘substances’, not just to ‘chemicals’ and its scope is much wider than is generally realised. Many thousands of substances will be affected, for example metallic alloys, preparations and articles. This in turn means that REACH will affect a wide range of industries. It is not just manufacturers that need to consider the importance of REACH but also downstream users. It is essential for downstream users to communicate with their supply chain to ensure the appropriate registrations are made for the substances critical to their businesses.
Awareness of REACH among the business community is low. A recent Defra survey found that only one per cent of SMEs had heard of it. The sanction for non-compliance with REACH is severe: ‘no data, no market’. Articles containing substances that have not been registered cannot be sold in Europe. For this reason, many companies consider this not so much a compliance problem as a business continuity issue.
There is a phase-in timetable for registration of substances which runs until 2018. The purpose of the phase-in period is to allow adequate time for the testing of approximately 30,000 chemicals. However, in order to benefit from the phase-in timetable, the substance must be pre-registered between 1 June 2008 and 1 December 2008. If a substance is not registered within this time period then it will not benefit from the phase-in and will require immediate registration before it can be put on the European market.
All businesses should be aware of their obligations under REACH and will need to consider how REACH will impact upon them. Immediate action needs to be taken to communicate with suppliers and customers to ensure that the preregistration window is not missed.
THE CARBON REDUCTION COMMITMENT
The Carbon Reduction Commitment (CRC) is a new government policy instrument which, from 1 January 2010, will target both direct CO2 energy use emissions and indirect CO2 emissions (ie from electricity) and which is aimed at achieving government targets to reduce emissions from large non-energy-intensive organisations in the private and public sectors by 1.2 million tonnes of carbon (MtC) per year by 2020.
The Government’s proposal is that the CRC will cover “organisations” with halfhourly metered electricity consumption exceeding 6,000 MWh per year. The aim of the 6,000 MWh threshold is to catch large non-energy intensive organisations in the private and public sectors, for whom energy efficiency benefits will outweigh administrative costs. This threshold corresponds to an annual electricity bill of approximately £500,000.
The Government currently estimates that the scheme will cover about 5,000 organisations, accounting for around 14 MtC annually. The types of organisations potentially covered by the CRC could include: large retailers and supermarkets, hotel chains, fitness centre chains, multiplex cinemas, mobile phone network operators, rail transport operators, large office-based service organisations, light industry and manufacturing, government departments, hospitals, universities and local authorities.
The new scheme will capture “organisations” which, in the private sector at least, means whole corporate groups, with the highest UK parent organisation assuming compliance obligations on behalf of the group. Accordingly, where a group has aggregate half hourly metered electricity consumption exceeding 6,000 MWh per year, all energy use emissions at sites with metered electricity will be caught by the scheme, although a flexible de minimis threshold is also proposed.
In order to minimise administrative and policy overlap, only energy use emissions outside Climate Change Agreements (CCAs) and the EU Emissions Trading Scheme (EU ETS) will be caught by the scheme. Organisations (or parts of organisations) with more than 25 per cent of their energy use emissions in CCAs would also be exempt.
The CRC proposes an auction-based ‘cap-and-trade’ system under which participants, having determined their own emissions targets, will be required to purchase allowances corresponding to their direct and indirect carbon emissions (either at auction or from each other) and then surrender them to the scheme administrator. The Government aims to begin the scheme in January 2010.
Under the ‘cap-and-trade’ system, participants will have flexibility to decide how they comply, as with the EU ETS – by reducing their own emissions or by purchasing more allowances that give them the right to emit. The Government proposes that the scheme would:
- cap total energy use emissions by deciding on the number of allowances issued for auction
- have a three year introductory phase (with a fixed-price sale rather than an auction, to encourage familiarity with the processes) followed by successive five year capped phases
- require voluntary reporting and certification of organisations’ own energy use with reference to annual energy bills (with self-certification to be checked by independent riskbased audits)
- feature a safety valve to avoid spikes in the prices of allowances and a buy-only link to the EU ETS (but there will be no link between the CRC and the current CCA market)
- provide for the publication of a league table, evaluating the performance of participants; and
- revenue raised through the auctions would be recycled to participants depending upon their performance in reducing emissions.
One of the Government’s key objectives is to engage senior management in carbon reduction initiatives. The cost impact of purchasing allowances, and the bonus available for good performance, means that those businesses that engage with the initiative to exploit the opportunities may be able to profit at the expense of others who regard the CRC as yet another burden.
ENVIRONMENTAL LIABILITY AND THE ‘POLLUTER PAYS’ PRINCIPLE
The UK Government is currently consulting on the implementation of a new European Directive on liability for harm caused to the environment by businesses. Draft regulations for England have been published (the devolved administrations will produce their own regulations).
The regime is designed to ensure that businesses which cause environmental damage are responsible for remedying the damage (implementing the ‘polluter pays’ principle).
Environmental damage is split into three categories: biodiversity, water and land. For biodiversity and water damage, the business must pay to restore the water or relevant habitat to its baseline condition. If the environment cannot be restored then it must take compensatory measures to compensate for the loss of that environmental resource for that period.
Anyone carrying out a commercial activity is caught by the regime. Under the regulations, such persons are referred to as “operators”. The regime contains both strict and fault based liability. Businesses that carry out certain operations which are already regulated (such as those regulated by environmental permits) will be liable for any environmental damage caused regardless of whether they were not at fault for that damage. All other businesses will only be liable if it can be proved that they were at fault.
The draft regulations also allow for two possible defences, both of which were optional under the Directive. The first is the “permit” defence – no liability will arise if the business was in total compliance with its permit. The second is the “state of the art” defence – no liability will arise if the business was operated with the best possible equipment and methodology available at the time.
In the UK, there will be an overlap with existing legislation for the protection of biodiversity, land quality and water, and businesses may need to comply with more than one regime.
Directors and business managers should bear in mind the following:
- There will be a requirement to notify the regulator if harm is caused or if there is an imminent threat of harm. This self-reporting mechanism is not present in the current UK regimes. Thought should be given to appropriate procedures for notifying the authorities if an imminent threat arises or damage occurs.
- There are express provisions for NGOs and other interested parties to request regulatory action. We are likely to see increased activity from environmental pressure groups monitoring the environment as a result.
- As currently drafted, the regulations provide for joint and several liability. Therefore, where more than one operator has contributed to environmental damage, the authority can pursue any one operator for the entire costs of the clean up, leaving that operator to bring its own claims for contributions from the other operators in the civil courts. There is a risk that authorities will target those businesses that have (or are perceived to have) deep pockets.
- Businesses should be aware that there will be a strict 28 day time period for appealing against a notice served under the regulations. As with other regimes (such as statutory nuisance), it will be important that businesses are aware of the 28 day time period and have in place a procedure to ensure that they deal with the notice before the expiry of the deadline.
Questions that businesses should be asking:
- How will REACH impact my business and what are we doing to prepare?
- Is my business caught by the 6,000 MWh threshold of the Carbon Reduction Commitment and are we getting ready to make the most of the trading scheme?
- Do we need to reassess our emergency response procedures in light of the self-notification provisions in the new Environmental Liability Regime?
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Simon Tilling is a solicitor and Robert Triggs is an associate in the environment team at Burges Salmon LLP. Simon specialises in environmental civil and criminal litigation and disputes as well as providing regulatory advice on environmental law: simon.tilling@burges-salmon.com
Robert specialises in carbon law and emissions trading and advises on a range of environmental issues relating to corporate and property transactions and renewable energy projects: robert.triggs@burges-salmon.com