Before Lehman Brothers and what followed, the UK took a conscious decision to lead the world by example, in terms of environmental regulation. 

Out of its cutting-edge policies came the introduction of the CRC Energy Efficiency Scheme ("CRC"). The CRC is unique because it tackles demand-side issues (energy consumption) rather than regulating direct emissions to the atmosphere, with the aim of incentivising a greater focus in business on energy efficiency.  This represented an all out attempt to change both thinking and  behaviours around energy usage rather than just financially penalising polluters.  And its out-of-the-box thinking on recycling revenues generated by the scheme (projected to be around £1 billion per annum by 2014-15) back to participants according to their ranking in a League Table of good energy-saving behaviour was also seen as ground-breaking. 

A new focus

But not long after the CRC scheme was announced to a huge fanfare, a change of government and a new focus on the country’s budget deficit in 2010 saw the concept of recycling revenues consigned to the dustbin, the Government needing the money, and the CRC starting to look worryingly like just another form of tax - by the back door.

On becoming Prime Minister in 2010, David Cameron pledged that his government would be the "greenest government ever".  Two years later and images of David Cameron courting the green vote from a sledge near the South Pole, seem hopelessly inappropriate.  The government's volte face on green policies was summed up by the Chancellor, George Osborne, who told Parliament last year: "... if we burden [British businesses] with endless social and environmental goals – however worthy in their own right – then not only will we not achieve those goals, but businesses will fail, jobs will be lost, and our country will be poorer".  Any hope that a political consensus had been reached in which green policy represented a business opportunity, rather than a cost, had been blown out of the water.

The battle between green and blue

However, there's no doubt that George Osborne has a point.  Some remarkably bad environmental laws have found their way onto the statute book in the past few years: some with the support of the Conservative party.Nowhere is the tension between green and blue better illustrated than in the current battle raging around the CRC.

The CRC, which was introduced by the last government with the support of the current occupiers of 10 Downing Street, is a unique scheme - globally - designed to lead the world in terms of green regulation.  Rather than regulating direct emissions of greenhouse gases into the atmosphere, the scheme focuses on energy consumption.  So, in very broad terms, any business (with more than a de minimis annual energy demand) has to buy enough CRC allowances to cover its energy consumption.  These are bought from the government, or other participants with an excess of allowances, and have to be surrendered annually back to the government.

As originally envisaged, there was going to be a cap on the number of allowances available which would have reduced over time, thus (in principle) increasing the cost of allowances and providing an incentive on businesses to increase their investment in energy efficiency measures.  This was also abandoned.

Another unique feature of the scheme, as originally enacted, was to be that the funds raised by the government in the sale of allowances were to be returned to participants, based on their position in the league table of performance, which was intended to reward improvements in energy efficiency.  The so-called recycling payment was one of the key ways in which the government managed to get business buy-in, because the money raised in the sale of allowances was not retained by the Exchequer, and so the CRC couldn't fairly be characterised as a tax.

Confusion reigns

However, problems with the CRC began to surface pretty much as soon as the scheme came into effect in April 2010.  The rules under which businesses qualified for the scheme were fearfully complex: in many cases, it was nigh on impossible for businesses to work out whether they were covered or not.  This was particularly the case in the private equity and banking sectors.  Next, the rules on monitoring and reporting of "emissions" proved to be complex: guidance on the level of records-keeping alone amounted to nearly 100 pages.  The government acknowledged these structural issues and began a "simplification" process – which is far from simple and, indeed, is still ongoing.

Then came the government's Autumn 2010 emergency budget.  The need to raise cash and cut spending took precedence over environmental concerns and Mr Osborne decided to retain the funds raised in the sale of allowances: an effective tax grab of up to £1 billion a year. 

Going forward

It now appears that the compact between business and government over the CRC is broken: in his last Budget (in March 2012) the Chancellor announced that if ways cannot be found to simplify the scheme, it will, by Autumn 2012, be abolished and replaced with a green tax.

In view of the fact that the "simplification process" looks, at best stalled, it seems quite likely that the CRC will be no more by April 2013 and Britain's leadership in innovative green thinking will be badly tarnished.The UK remains the only country to tackle energy consumption by way of an emissions trading scheme, so is still leading in this respect.  But in a sense it is a leader without followers.  The days when the world was watching the UK’s lead and deciding whether to follow suit seem a long time ago now.  And it has to be said that globally there is now a degree of pessimism about the possibility of any meaningful joined-up international action on climate change. 

However there are some bright spots:

• London remains the major global hub for the carbon trading
• The UK and European authorities remain committed to emissions trading schemes (albeit covering direct emissions) and the US has adopted the first state-administered cap and trade regulations - a major milestone, albeit focused on emissions rather than consumption
• Australia passed legislation last year to establish an emissions trading scheme by 2015
•  Canada, New Zealand and Japan are all also exploring cap and trade.

UK's lead position might be looking precarious, but even in these austere times, there is cause for optimism.

Michael Hutchinson is a partner in the environmental team at global law firm Mayer Brown [email protected]