Delivering net zero and nature recovery comes at a cost and the public purse isn’t big enough. The Government has therefore set out how it hopes to encourage the scaling up of private investment in these areas in the Nature markets framework (“Framework“). This article reviews the proposals which aim to reverse decades of failure to realistically value the impact of development on nature and the benefits that the natural environment provide to us all. It will also consider the speed bumps threatening to hinder the acceleration of the natural capital markets and how these can be flattened.
The main aims of the Framework appear to be to provide investors with the confidence to engage with these new markets and to ensure that tangible environmental benefits are delivered. Participants in any natural capital scheme must be prepared for scrutiny and we have already seen objectors target nutrient neutrality measures Nutrient neutrality – Wyatt v Fareham Borough Council as a means to delay development. Similar challenges to BNG schemes will inevitably follow.
The market is growing all the time with the main drivers being regulatory (BNG and nutrient neutrality) or voluntary with companies looking to improve their ESG credentials. The Framework recognises that nature markets can be further accelerated through the introduction of policy which allows land managers to combine such private income with public funding (ELM Environmental land management schemes: overview) that replaces the previous agricultural subsidy regime.
Investing in nature markets is not like buying Government Gilts and investors will require, as a minimum, standards, rules and governance to provide the necessary confidence. There are already considerable risks in investing in the living, natural world which is susceptible to climate change and other threats so a clear understanding of rights and obligations is crucial.
The key to unlocking the opportunities that nature markets represent is the sound underwriting of the “credit” by real environmental improvement which can be quantified and validated. Without that linkage the credit is worthless and confidence in such systems will collapse. The slightest hint of double counting or of greenwashing will be fatal.
As such, a number of principles have been identified in order to ensure such market integrity and the key one is additionality.
This is a phrase which is often encountered and it is probably worth taking some time to properly understand the issues. We see it very simply as ensuring that Mother Nature gets her money’s worth. That is, money invested in natural capital inputs must lead directly to environmental improvement.
There are various additionality tests which have arisen through the operation of market schemes or from the various consultations that have taken place.
For example, the Woodland Carbon Code assesses additionality with a legal and investment test. Any new planting must not be required by way of an existing legal obligation and must be uneconomic without the carbon credit income.
Referenced in the BNG Consultation Consultation on Biodiversity Net Gain Regulations and Implementation_January2022.pdf ,the Treasury Green Book The Green Book defines additionality as:
“a real increase in social value that would not have occurred in the absence of the intervention being appraised”
The British Standard on BNG is more restrictive in that the Green Book would encompass benefits outside the ambit of BNG whereas here the definition is:
“Property of measures to achieve biodiversity net gain, where the conservation outcomes it delivers are demonstrably new and additional and would not have resulted without it.”
The BNG Consultation is clear that any nature based interventions which are already required by law or agreement cannot be used to support claims for BNG or other emerging markets.
Using an example to illustrate these points, if a landowner of Whiteacre has been required to plant trees to replace others felled due to development those trees cannot be used to claim carbon credits because they were required to be there as a result of a planning obligation. There is no additional benefit in the form of increased carbon sequestration hence no carbon credits.
Under the Green Book definition, a different landowner of Blackacre might take land out of agricultural production and claim nutrient neutrality credits as a result. The recent Government response and summary of responses to the BNG Consultation has indicated that BNG and nutrient neutrality credits may be sold from the same nature based intervention. This means that if habitat is created on the former agricultural land then both those types of credits can be generated and sold. However, a landowner would not be able to claim soil carbon credits on the same area of land.
However, the same landowner could then plant trees on Blackacre (already being utilised for BNG and nutrient neutrality credits) and claim carbon credits as long as the trees are not required to contribute to the metric calculation for BNG purposes or are factored into the nutrient neutrality calculation as increasing phosphate or nitrogen uptake. If those criteria are satisfied then the trees are a new and additional nature based intervention and so the additionality rules are satisfied.
Such principles then need to be implemented which requires rules, standards and governance.
The rules bring together the three most important factors for nature markets to succeed:
The Framework refers to “more than one type of separate credit or unit is issued from the same activity on the same parcel of land” but with respect to the draftsman I don’t think this is right.
In my view, stacking is where different types of credits are derived from one or more activities on the same piece of land. Using the example above, you could stack BNG, nutrient neutrality and carbon credits on Blackacre but the activities are different. The land is the constant on which the credits are stacked and there is no requirement that they emanate from the same nature based intervention. Land managers will still need to navigate the stacking rules of individual schemes.
Bundling is where several different environmental benefits are combined in a single credit. The bundle may be explicit in that the separate benefits are identified and quantified or it may be implicit in that only one benefit is identified with everything else thrown in as part of the deal.
An example of an implicit bindle is the offering under the UK Woodland Carbon Code where the wider benefits of woodland creation are sold along with the carbon. It seems doubtful that such generous terms will continue much longer.
The Framework commits to greater use of stacking and explicit bundling as it encourages efficient land use and environmental improvement. The additionality risks inherent in stacking and bundling are identified in that subsequent habitat improvement must be delivered on top of an initial activity – as I set out above in the Blackacre example. As that shows, the greatest jeopardy lies in the mixing of regulatory and voluntary markets and this aspect will be kept under review.
I have set out the existing additionality rules above and the Framework states that a move might be made to a single financial additionality test which could be applied across multiple nature markets. It appears that the concept of regulatory 2+2=5 which allows BNG and nutrient neutrality to be claimed from the same intervention will remain.
The pressure on public finances means this is something of an open goal as long as double counting is avoided. The principle of additionality is also important here.
Using the example of peatland restoration, grant funding may have been received for the blocking up of ditches and grips so as to encourage re-wetting and the increased sequestration of carbon as a result. The current rules would prevent BNG credits being sold as a result of those grant funded works and additional habitat enhancement works would be required in order to achieve that.
The ELM principles are that participants can blend public and private income so long as they are “compatible, pay for different or additional outcomes and do not pay for the same outcome twice.”
In practice, this will mean that the environmental benefits achieved by ELMS participation will have to be assessed and baselined so that the stacking on top of private schemes can be shown to be different and additional.
Some leeway is to be granted in that the entry level ELM scheme (Sustainable Farming Incentive) land can be used for private schemes providing any such scheme rules are adhered to. At the other end of the ELM pyramid, Landscape Recovery is seen as tailor made to admit private finance and the team at Michelmores has advised several projects on this aspect in the last few months.
The Framework also confirms that a pipeline of investment standards for nature markets will be expedited although governance is likely to be left to the industry itself. One area of governance focus is the secondary market in credits and the need for transparent systems to avoid double counting.
A lot of ground is covered in the Framework and it highlights the lack of secondary legislation in this area. There is an urgent requirement for this guidance and the nature markets cannot progress without it.
Michelmores are looking forward to putting on another Agriculture Roadshow, between 3-7 February 2025. Following the success of our tour last year, we are going...
