Net zero real estate: offsetting and natural climate solutions

Out-Law Guide | 06 Sep 2021 | 9:12 am | 1 min. read

There is growing interest in using land to develop natural climate solutions that can help businesses meet their emissions reductions targets. There are a number of structures that landowners and purchasers can put in place to facilitate this.

What are natural climate solutions?

Examples of natural climate solutions include the creation of new woodland under the Woodland Carbon Code or peat restoration under the UK Peatland Code. The carbon offsets, called Woodland Carbon Units or Peatland Code Carbon Units, that can be generated from eligible solutions can be bought by companies wanting to offset their emissions to meet their corporate pledges to reduce their climate impact, or can be sold on the open market.

We are also seeing increased demand from companies wishing to offset their emissions for robust carbon offsets to purchase, such as Woodland Carbon Units or Peatland Code Carbon Units.

Potential structures

We have seen examples of direct agreements between the landowner and developer of the woodland and the party wishing to purchase the Woodland Carbon Units from the project, but we have also seen partnership arrangements, which might involve a transfer of all or part of the land and can involve a management fee to the landowner for managing the woodland in accordance with the Woodland Carbon Code.

In many cases we are seeing purchasers of credits and project partners prepared to pay for the up-front costs of afforestation and getting registered and validated under the Woodland Carbon Code, in exchange for securing the supply of a sufficient number of carbon credits to cover the relevant emissions at a fixed price over a period of years.

There is also a £50 million guarantee scheme which allows eligible participants in the guarantee scheme to sell Woodland Carbon Units to the UK government at a guaranteed price over 35 years, as the government seeks to promote afforestation and a robust market for Woodland Carbon Units. This can provide some certainty in cases where there is not a definite long term offtaker for the credits to be generated.

Whichever structure landowners or purchasers are considering it is important that due diligence is undertaken regarding the ability of the project to comply with the Woodland Carbon Code, or, if the natural climate solution is not woodland, other relevant carbon offset standard such as the UK Peatland Code.

Depending on the circumstances there may also be scope to ‘stack’ other environmental benefits from which money can be generated on the same land, such as in the future biodiversity credits or payments for ecosystem services. We are already seeing contracts which refer to and seek to allocate ownership in these potential additional future benefits. However, the scope for this will have to be evaluated on a case-by-case basis. In particular, the additionality related eligibility criteria under the Woodland Carbon Code, or other relevant carbon offset standard, would have to be carefully considered.

There are also various international carbon offsetting schemes and standards, though issues remain over the credibility and robustness of some standards and their measurement and verification arrangements. The Taskforce on Scaling Voluntary Carbon Markets has made a number of recommendations, but further work still needs to be done in order to provide full confidence in the international carbon offsetting market.