Sleepwalking into the carbon markets?

On 1 March 2023, NatureScot announced a £2 billion private finance pilot designed to secure landscape scale restoration of native woodlands.

The project involves NatureScot and private companies Hampden and Co., Palladium and Lombard Odier Asset Management Europe) Ltd.

NatureScot has provided me with a copy of the Memorandum of Understanding (MoU) with the agreement of the investment partners. It is worth a read – it is only 5 substantive pages.

In the MoU, signed in February, the parties agree to explore the potential for a significant investment in woodland creation in Scotland focussing on the Scottish Borders and the Atlantic Rainforest.

The parties aims are inter alia to “catalyse private investment into the project at significant scale”, to deliver “high integrity carbon investment”, demonstrate how government policy and subsidy support can enable private investment into nature restoration” and “maximise the benefits for nature and communities from the investment”.

Hampden and Co will provide finance for the project via Special Purpose Vehicles (SPVs).

Palladium will design the project, establish SPVs and lease with partners on the ground to agree terms of investment and carbon contracts.

Lombard Odier Asset Management Europe) Ltd. will be responsible for selling carbon credits.

The project will provide financial returns for landowners and investors whilst claiming to “deliver significant and lasting community benefit“. See the NatureScot media release for a full FAQ on the project

This blog is not so much about this project which will at least provide some greater transparency around how carbon markets may evolve in Scotland but about the assumptions and policy decisions which appear to lie behind it and other activity undertaken by Scottish Ministers to promote carbon markets and private investment.

Carbon Offsetting

Scottish Ministers have stated an ambition to develop carbon markets in Scotland as a means of securing private investment in nature restoration and contributing to the statutory net-zero climate targets. Offsetting is the means by which polluters can buy carbon credits to offset their emissions. Carbon credits are typically sold by brokers on behalf of landowners whose management activities (such as tree planting and peatland restoration) lock up carbon or (in the case of peatland restoration), curb existing emissions.

The development of a carbon market is seen as key to attracting the kind of investment represented by the financiers behind this project as as has already taken place by financial companies such as Aviva and Standard Life.

The problem with this whole approach is that there has been no comprehensive assessment made of to what extent carbon offsetting should be part of Scotland’s net-zero plan. Every ton of carbon that is sequestered by woodlands (for example) and offset against emissions by cement factories or fashion companies, is a tone of carbon that is contributing nothing in the long term to net-zero since it has been sold as an offset to a polluter enabling them to continue polluting.

How much of Scotland’s land shoudl we allow to be used for this purpose?

No answers have been forthcoming from Government and yet it is a central player in this market since it provides the key means of validating claims about carbon credits through its Woodland Carbon Code and has provided guidelines for investors through the Interim Principles for Responsible Investment.

In the FAQ associated with the project, NatureScot claim that carbon offsetting is an important part of global agreements on climate change. However, there are no legally-binding agreements in place that govern who can use offsetting. The MoU claims that an ethical framework will be developed to ensure that offsets are used only by “legitimate businesses who have credible carbon reduction pathways in place”.

Even more fundamentally, even if offsetting is a legitimate means of companies with unavoidable emissions achieving net-zero, why should then be expected to acquire offsets rather than simply, for example, having their emissions assessed by Government as unavoidable. Such registered emissions would then be accounted for within national carbon budgets with no need for a private, unregulated market in carbon offsetting.

The £20 billion finance gap

Central to the Government’s argument is the so-called “finance gap for nature”. In NatureScot’s media release, the Minister, Lorna Slater is quoted,

Biodiversity Minister Lorna Slater said: “The finance gap for nature in Scotland for the next decade has been estimated to be £20 billion. Leveraging responsible private investment, through valuable partnerships like this, will be absolutely vital to meeting our climate targets and restoring our natural environment. Scotland is well placed to take a leading role by offering investors the opportunity to generate sustainable returns from the restoration and regeneration of our landscapes. This investment will generate multiple benefits: ending the loss of biodiversity, improving water quality, reducing the risk of flooding, regenerating local communities and creating green jobs.”

What exactly is this £20 billion finance gap? The figure derives from a report published by the Green Finance Institute, an “independent, commercially focussed organisation backed by government and led by bankers”. In the “Finance Gap for UK Nature” report, published in October 2021, the gap between required spending and committed spending by Government to deliver nature restoration is claimed to be between £44 and £97 billion. For Scotland, the gap is £15-£27 billion with a central estimate of £20 billion.

The nature-based outcomes covered by this gap are illustrated below (figures are UK-wide).

The breakdown in the finance gap for Scotland is illustrated below.

The finance gap thus covers a wide range of outcomes of which, for Scotland, the largest (£9 billion) is bio-resource efficiency (making land use more carbon neutral principally though better fisheries management and soil management). The second largest is the protection and restoration of nature (£8 billion). Woodland creation is only one part of this with others including protecting endangered species, restoring freshwater habitats, ensuring seafloor habitats and healthy and sustainable and achieving biodiversity net gain.

Should we be planting trees?

Of the £20 billion finance gap, £8 billion of for the restoration of habitats and only part of this (the Finance Gap for UK Nature report provides no further breakdown) is for woodland creation and management.

In addition to the unanswered question of what role (if any) offsetting should play in Scottish climate finance, is the question of whether we even need all of this private investment in the first place. Clearly we do need private investment. Over 85% of Scotland is privately-owned and the public is not in a position to make all the investment that is required.

It is at this point, however, that there appears to have been no detailed analysis by Government as to how nature restoration could be supported. Instead, it has jumped onto the rapidly growing carbon offsetting model.

There are alternative means of restoring nature. Here are some.

• Landowners could be placed under legal obligations to restore nature (the damage to which has been caused in large part through their management activities) through the tenure system or through policy instruments such as the Land Rights and Responsibilities Statement.
• Government could implement the recommendations of the Deer Working Group to reduce wild deer densities to the level required to allow forest regeneration.
• Reform agricultural support to require nature restoration as a condition of agricultural subsidy.
• Strengthen biodiversity gain through the planning system.
• End damaging actives such as muirburn.
• Reform land and property taxes to deliver woodland, water and peatland restoration

Regulating existing ownership and use of land in ways designed to restore nature and contribute to net-zero has huge potential to achieve nature restoration goals. Much of this will be at no cost to the public purse and will not involve global financial corporations becoming partners in any such activity.

Currently, government is sleep-walking into a future of global capital and carbon markets with no clear policy on whether and why offsetting should even be supported and no clear plan as to the extent to which alternative policy measures could deliver landscape scale nature restoration.

This blog has been supported by donors to my defamation crowdfunder who kindly donated their eligible refunds to my work on land reform.