Out-Law / Your Daily Need-To-Know

Earth Day: creating a market for ecosystems services

Out-Law Analysis | 22 Apr 2021 | 8:12 am | 3 min. read

The Earth is in the midst of a climate emergency, with scientists, and increasingly others, warning we are dangerously close to a number of potential climate 'tipping points', and the mass extinction of species.

The use of all the tools at our disposal in order to both drastically reduce greenhouse gas emissions and draw down existing carbon dioxide in the atmosphere, with the aim of limiting further global warming and conserving the Earth as a sustainable, equitable and habitable place for humans and other species, is not only essential; it is also good business.

Climate-related disclosures

The UK government announced its intention in 2020 to make disclosures in line with the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations mandatory across the economy by 2025, and is currently consulting on requirements for mandatory climate related financial disclosures for publicly quoted companies, large private companies and limited liability partnerships.

Hot off the press is acceptance of the Climate Change Committee advice to set a stretching new emissions reduction target of 78% by 2035, which will for the first time also cover international aviation and shipping.

Many businesses have already been setting their own – often ambitious – net zero targets, driven by pressure from investors and customers.

Setting the targets is the easier part of the exercise. Designing and implementing a plan for meeting them is an altogether more challenging matter.

Recently companies have turned to natural climate solutions, such as woodland creation and peatland restoration, to help offset residual emissions and meet net zero targets. The woodland carbon code and the UK peatland code are both voluntary certification standards that independently validate and verify the carbon sequestered by natural climate solutions projects. This provides crucial assurance to those purchasing or claiming the benefit of the resulting carbon offsets.

Ross Fiona

Fiona Ross

Senior Associate

Setting the targets is the easier part of the exercise. Designing and implementing a plan for meeting them is an altogether more challenging matter.

The trend provides an opportunity for companies with large estates and land interests, both in terms of meeting their own net zero targets and in providing the land or delivering the projects that will help others to meet theirs.

The government has even set up a fund for the guaranteed purchase of carbon credits generated under the woodland carbon code for a set period, to help stimulate the creation of new woodland in the UK. There are also grants available for establishing such projects.

Landowners are increasingly partnering with corporates wishing to meet their net zero commitments, to provide up front funding for the development and establishment of these types of projects and contracting to purchase the resulting carbon credits. 

However, landowners are also considering other potential structures across their land assets and interests.

Biodiversity under focus

Biodiversity net gain is, at the same time, being embedded into the planning system through the Environment Bill, and biodiversity or wider environmental net gain policies are being included in Local Plans and other policies.

Biodiversity is also moving up the political agenda, with the UN Biodiversity Conference set to take place in China in October 2021. Since September 2020, an informal working group including the UN and World Wide Fund for Nature has been working on a scope and work plan for a Taskforce on Nature-related Financial Disclosures, which will design a disclosure framework for natural related risks, likely following a similar model to the TCFD.

There is therefore a developing opportunity and market for 'biodiversity offsets', which may be bolstered by regulations that could be brought forward under the Environment Bill to provide for a new system of biodiversity credits.

Natural capital

There is still more to be done to build sustainability into the heart of infrastructure projects, by making more of ‘natural capital’. This refers to the natural assets that society and the economy depend upon, such as the atmosphere, forests, fisheries, rivers, biodiversity, land and minerals, and both the living and non-living aspects of ecosystems.

The National Infrastructure Commission (NIC) published a discussion paper on environmental net gain and natural capital in February 2021, in which it advocated for natural capital frameworks and analysis to be used in decision making for infrastructure projects, such as business cases and investment appraisal.

The NIC indicated that it intends to develop a set of natural capital principles to help establish how net gain can also be delivered in infrastructure projects.

In addition, the government's new Environmental Land Management Scheme, which is replacing the Common Agriculture Policy, includes three new schemes under which farmers and other land managers can enter into agreements to be paid for delivering things like clean and plentiful water, clean air, and thriving plant and wildlife, as well as reduction of and adaptation to climate change.

Building a unified market

Taken together, these could be important steps towards the creation of a market for ecosystem services from land, going beyond carbon sequestration and biodiversity and encompassing water quality and availability, flood management, air quality and other services.

Ultimately, it may be possible to derive multiple revenue streams for such services from one parcel of land, subject to meeting the relevant certification standards, whilst helping to deliver environmental improvements and contributing to achieving ‘net zero’.

The monetisation of these services is an important incentive to the delivery of nature-based solutions on a wider basis, and when taken together with mandatory disclosure of climate change, and potentially nature related, risks, and the drive for companies to reach net zero, there is a powerful rationale and clear benefits to such projects in addition to their role in helping to address the climate emergency.