Can the risks of natural capital markets be managed?

Land in the UK is under increasing pressure. The longstanding demands of food production and housing have been joined by new needs arising from the goals of decarbonisation and protecting biodiversity. These are already leading to controversy. In their campaigns for the Conservative Party leadership, both Rishi Sunak and Liz Truss railed against the installation of solar arrays on farmland; and local politicians, too, are raising concerns about the purchase of land for tree planting.

Driving this pressure is the emergence of new sources of funding, such as the sale of carbon offsets and the resources that will flow from developers’ new biodiversity net gain obligations. Is there a way in which the different calls on the UK’s limited landmass can be balanced that may help avoid unintended negative outcomes?

Trees a crowd

As businesses and public bodies start to look seriously at how to reduce their net carbon emissions towards zero, many are looking at a combination of emissions reduction and the use of ‘negative emissions’ strategies, such as tree planting, to remove carbon dioxide from the atmosphere.

Planting the required number of trees is going to require a lot of land. The Committee on Climate Change has called for 22% of UK land to be released from agricultural production for carbon sequestration. The Government has pledged to plant 30,000 hectares of forest (around 0.1% of UK land) each year from 2025. Meanwhile, analysis by Oxfam shows that meeting the tree planting targets of the four biggest fossil fuel companies that have made net zero pledges to date, would require an area more than twice the size of the UK by 2050.

At the same time, the transition to renewables means giving more land over to energy generation. And in addition to the climate emergency, many local authorities are recognising an ecological emergency that requires land to be set aside to restore the UK’s depleted biodiversity.

But the new ‘natural capital’ markets that are developing to meet these climate and biodiversity goals are already raising concerns.

Market making

Natural capital is the term used for elements of the natural environment such as forests, oceans and soils that provide valuable goods and services. These can be understood as provisioning (e.g. water, food, materials), regulating (e.g. carbon sequestration, urban cooling, noise mitigation) and cultural (e.g. tourism, recreation and wellbeing).

Many of these goods and services have long been assigned an economic value, but the idea of natural capital markets is to place financial values on those that have hitherto lacked them. While there are limitations to the natural capital approach, which may not cover all services, or which set prices that poorly reflect their value, the aim is to better incorporate the value of the natural world into decision making.

Natural capital markets offer income opportunities for land owners and farmers. Research by the Green Alliance estimates that sequestering carbon in trees, hedges and soils, and activities which avoid emissions from peatlands, could be worth up to £1.7 billion per year in the UK.

So, can we just let the natural capital market deliver these much-needed climate and biodiversity services?

Well as it stands, natural capital markets are subject to neither framework nor controls. The risk with this free-for-all market process – as emerging trends are beginning to indicate – is that it may lead to sub-optimal outcomes for both local communities and the environment.

Farmed out

Negative social impacts are already evident, especially where land is relatively cheap. Farmers in Wales, for instance, have raised concerns over the increasing number of Welsh farms and land being bought by people and companies from outside Wales for tree planting to offset carbon emissions.

According to the Farmers’ Union of Wales (FUW), in the past three years 75% of the biggest tree planting plans on Welsh land came from land owners based outside the country. While the FUW supports woodland creation within farmland, they also warn that the displacement of existing owners and family farms would damage the wider rural economy and community.

Similar tensions are emerging in Scotland. A report published by the Scottish Land Commission shows that nearly half of all estates bought in Scotland in 2021 were purchased by investment funds, charitable trusts or corporations looking to offset carbon or develop large-scale environmental improvements. For the same year, Savills announced a 98% increase in the number of wealthy clients registering to buy land, a rise driven by demand for land for tree planting.

In both Scotland and Wales there are fears that local farmers will be priced out. Growing demand from non-farming investors and corporate entities combined with existing pressures from the timber market and food production, is pushing land prices up. In 2021 for instance, Scottish farmland values rose by 31.2% compared to 6.2% across the UK. What’s true within the UK is also true internationally. This problem is even more acute in low-middle income countries where indigenous rights, land and food security are at risk, with some calling it ‘carbon colonialism’.

But surely these tree planting projects will deliver the environmental benefits which we need? The reality isn’t that simple.

New indus-tree

At present, carbon offsetting, predominantly through afforestation, is the fastest growing voluntary ‘natural capital’ market in the UK. Afforestation projects tend to favour densely-planted conifer trees because they grow (and thus absorb carbon) quickly. Sitka spruce is particularly popular and is also the preferred tree for timber production.

The problem is that compared to native UK mixed broadleaf woodland, such plantations have lower biodiversity and are less resilient to climate change and disease. There is even research that suggests forests with increased species richness may store more carbon than a monoculture, although the results are disputed.

Image: Damien Walmsley (CC BY-NC 2.0), via Flickr.

The dash for carbon offset in an unregulated market risks repeating poor policies from the past, with the creation of large mono-culture plantations of non-native tree species. We have seen that before, dating from the creation of the Forestry Commission and its original mission to restore forests felled for timber in the First World War. However, this focus on timber production led to mistakes in ecological terms. In the 1970s and 80s for instance, tax concessions and grants encouraged investment in plantations on cheap land, especially peatland. As a result, vast areas of peatland, particularly in Scotland’s northern Flow Country, were drained and forested with Sitka spruce. Not only was peatland – which is a valuable habitat and carbon sink – lost, but many plantations saw slow tree growth and problems with pests and diseases.

As a low carbon substitute for plastic and steel used in construction and packaging, Sitka will remain a component of our forests. But an undue focus on one particular commoditised function (i.e. carbon sequestration) could leave us with a landscape that – like the industrial timber plantations of the past – is significantly limited in what it offers people and the environment.

Tinder for timber?

So how can we steer the emerging carbon offsets market in a different direction?

First, other ecosystem services and benefits which are not yet commoditised to the same extent as carbon, such as flood prevention, urban cooling and wellbeing, must be considered – as must the impact on food production and local communities.

Second, more active ‘matchmaking’ between funders and projects is needed to avoid an oversimplified approach based on purchasing a single ecosystem service. Being consultative and place-based will help ensure greater community buy-in for projects which achieve multiple environmental and social outcomes. While land use is subject to the market forces, there is a role to be played by local government and third party ‘brokers’ in shaping the natural capital market to create richer landscapes and to safeguard community interests.

Eunomia uses a Natural Capital Assessment tool to support landowners in understanding the natural capital value of their land. The tool aims to capture multiple contributions including agricultural production, flood regulation, water quality and climate regulation, as well as mental and physical health benefits, education and recreation.

By working at a smaller scale and capturing these wider benefits, we can create a prospectus for investors which offers broader outcomes and respects the locality in question. Learning from and building on such an approach will be vital for the success of larger scale interventions.

Natural capital markets are rapidly growing. So too is the pressure on land. Land use and management will undoubtedly have to change to address the climate and biodiversity crises. While natural capital markets have the potential to be a helpful way of choosing how best to use a particular parcel of land, they need to be designed to deliver outcomes that are environmentally rich and socially just. If they fail to do this, they risk creating justified opposition to measures that are critical to efforts to reduce greenhouse gas emissions and environmental degradation.

Featured image: Craig Bradford via Unsplash