HomeNatural environmentDone right, new natural capital markets offer big opportunities for businesses and farmers

Done right, new natural capital markets offer big opportunities for businesses and farmers

There are big changes afoot for agriculture and land use in the UK. Imperatives to halt climate breakdown and the decline of nature have led to a growing number of government targets requiring more action in the coming years. These targets cover a spectrum, including a legally binding aim for a net zero carbon economy and the mission to end nature decline by 2030, as well as commitments to protect 30 per cent of land for nature and reduce methane emissions by 30 per cent, also by 2030.

New markets for carbon credits, water quality improvements and biodiversity credits for developers, compensating for environmental damage from building, should play an increasing role in achieving these goals.

These markets will bring new income opportunities for farmers and other land managers. For example, research carried out by Green Alliance estimates that sequestering carbon in soils, trees and hedges, and activities that avoid emissions from peatlands, could be worth as much as £1.7bn a year in the UK.

The new markets need to be well governed to be trusted
But these new markets are not guaranteed. Left to their own devices they may not develop much, or in a way that’s best for farmers and rural communities. A fair and robust system that maximises the possibilities depends on carefully designed governance.

These so called ‘natural capital markets’ will have a bigger impact in some locations than others. There is a lot of focus on the uplands, as areas that can take more tree planting and where farming tends to be less profitable.

Perhaps more surprising, the Green Alliance analysis showed that a pure market approach to carbon reduction and sequestration could also change land use on lowland fens, which are highly productive and profitable for food production. This is because farming causes lowland peat to release a lot of carbon, so a relatively low carbon price can make it economically rational to stop farming and restore the peat. While environmentally beneficial, this creates a clear conflict with food production.

Our analysis skimmed the surface. We could only provide outline information on the potential. What is really needed to get the markets going is a strong new land use framework with detailed spatial data on the state of natural capital across the country. It should also provide good information on government targets to enable well informed decision making in both private markets and public policy making.

Carbon offsetting is possibly the fastest growing voluntary natural capital market. Farmers and other land managers are getting in on the act by planting trees, restoring upland peat and introducing regenerative agriculture techniques like no-till farming. But, ironically, while being sold in the service of action on climate change, this can damage the environment if not done well. Strong standards, such as the UK’s Woodland Carbon Code and Peatland Code are designed to make sure that carbon credit projects do what they claim and do not, for instance, harm habitats and species in the process.

Offsetting should be used in addition to emissions cutting
It is also possible that trading carbon credits will mean businesses opt for offsets instead of reducing their own operational emissions. The impact of this could slow down emissions cuts across the economy overall. The system should make it clear that offsetting must only ever be used as an additional activity, on top of reducing emissions as fast as possible.

Businesses in the market for carbon credits should also be aware of the difference between credits for emissions reduction and those claiming carbon removal. In the case of removal, an emission from the business buying the credit is effectively removed from the atmosphere elsewhere and stored, tit for tat, meaning there is no extra CO2 added to the atmosphere. But reduction credits, such as those currently created by the Peatland Code, are reducing the CO2 burden from land based activity. While still arguably useful for tackling climate change, they should not be used by the  business purchasing them to make claims that they are net zero, because emissions from the business operations are not affected and stay in the atmosphere. It is important that businesses don’t use offsetting to make misleading claims.

An Office for Carbon Removal would increase market confidence
Buyers need to trust the quality of offsets, and claims have to be believed for the market to function well. A new government founded Office for Carbon Removal is needed to make sure the right policies and frameworks are in place and adhered to, giving companies and land managers the confidence to participate.

Another barrier to natural capital markets is the large proportion of tenant farmers who may be inadvertently excluded from taking part. Half of farms in England and Wales are wholly or partly tenanted. Short term tenancies make it hard for farmers to show they have sufficient management control of land to fulfil a longer term natural capital agreement. Restrictions in some tenancy agreements can also actively discourage or restrict tenant farmers from carrying out activities that improve natural capital, like tree planting or sequestering carbon in soil. Achieving ambitious national environmental goals will be a lot easier if all farmers and land managers can be employed in meeting them. This may require new arrangements between tenants and landlords so all farmers can access the new income generating opportunities.

Without the right governance, those seeking natural capital outcomes like carbon sequestration may simply choose to buy up farmland rather than pay existing farmers for environmental outcomes on their land. This is already causing controversy in some rural areas, and businesses wanting to invest in natural capital would do well to avoid the pitfalls.

Natural capital markets are currently small but they are growing fast, with the Woodland Carbon Code now accounting for almost a quarter of new woodland planted in the UK each year. Changes in land management and land use must happen over the next decade if the 2030 nature goals and 2050 net zero target are to be achieved. These changes can be done in ways that benefit farmers and rural communities. The window of opportunity to shape these new markets is open and needs to be seized by both businesses and government.

This post was originally published on Business Green.