For a long time, businesses and climate policy have prioritised decarbonisation and net zero. However, in the last year the protection and enhancement of our natural world has stepped into the limelight: with the COP15 biodiversity conference in Montreal and more locally, the biodiversity net gain regime which comes into force in England later this year.
Last week, along with a number of other climate policy announcements, the UK Government published its Nature Markets Framework. Its aim is to increase the amount of private finance flowing into England's nature recovery to at least £500 million a year by 2027 rising to more than £1 billion by 2030 – targets first set in the UK's Environmental Improvement Plan. This briefing describes the main elements of the new framework.
Why do we need nature markets?
The essential services provided by nature are well-established, and include the capture and storage of carbon, improving biodiversity, clean water supplies, and natural flood management; all of which are critical, yet adversely impacted by climate change.
Establishing robust voluntary and compulsory markets for nature establishes a route for landowners and others who want to undertake nature improvement works, such as planting trees, restoring peatlands, or undertaking biodiversity improvements, to access large amounts of investment that may otherwise be unavailable. This secures positive environmental outcomes, and often creates employment and business opportunities in rural areas.
Current and emerging nature markets
The UK currently operates two relatively small-scale nature markets – the UK Woodland Carbon Code and the UK Peatland Code. The Woodland Carbon Code has grown since its introduction in 2017/18 and is now responsible for having sequestered approximately 8 million tCO2 equivalent cumulatively. The UK Peatland Code has resulted in an aggregate 750,000 tCO2 equivalent but has seen significant growth in the past year, with the majority of carbon units being created in the last 12 months.
Two compliance markets are also developing in England – the biodiversity net gain regime and nutrient credits. This is a response to the impact of new housing developments on water quality in certain parts of the country; both of which are expected to be a 'step change' in the scale of nature markets. A new market in relation to marine net gain is likely to emerge in the coming months.
The Government expects to develop and pilot new nature markets in future, which may include carbon sequestration from hedgerows, re-wetted peatlands, saltmarshes, and seagrass. Markets may be established for natural flood management, such as restoring bends in rivers, changing the management of land to enable soils to absorb more water, and creating saltmarshes to absorb wave energy. Finally, the UK Emissions Trading Scheme may be expanded in the near future to make nature-based solutions that are eligible as a means of greenhouse gas removal.
Principles of effective nature markets
The Government recognises that all participants in nature markets will need clarity and confidence, with robust standards and governance systems in place so that nature units and credits can be relied upon as having genuine ecosystem service benefits. To that end, the Nature Markets Framework describes in detail the principles for market operation.
- Additionality – nature credits or units must create new environmental improvements over and above an established baseline.
- No double counting – the credits and units should not be sold for the same purpose once, nor should they be used as the basis for two claims.
- Robust quantification – any benefits secured need to be assessed against a defined set of standards, which are reviewed regularly.
- Lasting benefits delivered – environmental outcomes need to be delivered, recognising delivery risks and mitigation. The framework proposes the possibility of insurance and unit buffers (holding back sales) to ensure that outcomes are met. The framework also recognises that different markets will need land to be managed for extended periods of time, depending on the outcome sought.
- Transparency – market operators need a recognised and credible registry for units and credits; which will enable purchasers to conduct appropriate due diligence of projects, as well as details such as the relevant code or standard, project documents, ownership etc. based upon standardised data.
- Validation and verification (assurance) – nature projects need to be validated by qualified experts; and following implementation, verification by a qualified body.
- Ease of access to markets – markets should be simple, with barriers removed (within reason) for all participants. Overly complex markets will impede investment.
- Support the best use of land/sea for multiple benefits – wherever possible, land and seascapes should be used for multiple nature markets at the same time (stacking – see below) and indeed, should be incentivised for doing so.
- Openness to innovation – the framework notes that adopting new technologies can bring nature benefits and market benefits, for example in relation to monitoring, reporting, and verification.
Market rules
The framework describes the rules being considered by Government to support the development of nature markets. One of the fundamental rules, alongside the approaches to ensure additionality; and combining public and private finance, relates to stacking and bundling.
- Stacking occurs where land can be used to secure more than one environmental outcome, so for example a woodland manager may be able to sell carbon and water quality units from the same project. This can be an extremely efficient way for landowners and manager to increase their income, potentially driving more ambitious projects to be delivered.
- Bundling occurs where a single nature unit or credit is sold, which brings with it multiple benefits, for example bringing carbon, biodiversity and water quality benefits. Bundles can be both explicit, with several benefits quantified; or implicit with one quantified benefit and others assumed to be sold alongside it. The UK Woodland Carbon Code and UK Peatland Code are implicit bundles, as only the carbon sequestered is quantified, and not the wider benefits.
The framework notes that robust quantification will be critical. Government seems to be in favour of stacking and explicit bundling, and it is likely that as nature markets develop, landowners and managers will be encouraged to deliver multiple benefits. Stacking and bundling bring with them obvious advantages, but also some risks in terms of verification and additionality, so the Government will almost certainly be keeping those aspects of nature markets under close scrutiny.
Next steps – Standards and governance
The Government recognises that a lack of nature investment standards is holding back investment and market development, particularly where recognised methodologies are in the very early stages. The British Standards Institution has been appointed to prepare a series of investment standards for nature markets and the quantification of ecosystem services, although these are unlikely to be ready for up to three years
The Government anticipates that secondary markets will open up for natural capital credits, and the trading platforms will likely develop in order to support transactions between participants. The framework notes that the Government will welcome innovation to help markets scale up and will be consulting in future on regulatory interventions that may be needed to enable high-integrity markets.
Conclusion
The carbon sequestered in the UK since 2017/18 through woodlands and peatlands has demonstrated the potential for nature markets. As biodiversity net gain goes live at the end of 2023 in England, the UK will see dramatic increases in the number of nature market participants and substantial environmental benefits: through BNG, the UK will see nature markets become mainstream.
Although natural capital is now an asset class in its own right, the Government's framework will help to promote the standardisation and governance principles to unlock debt and equity investment on a wider scale and thereby accelerate an environmental transformation in the UK.
To discuss any of the issues in this briefing further, or if you are interested in becoming a participant in current or future nature markets, please contact sustainability partner Ben Stansfield or head of project finance Nath Curtis.