Introduction
The role that Scotland’s land will have to play in achieving net-zero greenhouse gas emissions (GHG) by 2045 is significant.
The Scottish Government has set ambitious targets for woodland creation and peatland restoration to achieve multiple aims, including helping to mitigate climate change by removing carbon dioxide from the atmosphere and storing it (known as sequestration), protecting carbon sinks, restoring habitats and supporting the rural economy. These targets, and the incentives that have been put in place to support them, are bringing significant land use change. At the same time, investors are looking to Scotland’s land to seek to offset their own emissions or to sell sequestered or avoided emissions to others via the carbon market.
As the scale of the challenge for both the biodiversity and climate crisis has become more apparent, questions have arisen about how to fund appropriate interventions. This blog is the first in a series looking at established and emerging mechanisms designed to encourage private investment in Scotland’s natural capital, how natural capital finance works, and what the key issues are.
What is natural capital?
Natural capital is a term for the world’s stock of natural resources, including the habitats and ecosystems that provide social, environmental and economic benefits to humans. The Scottish Government describes natural capital as “the environmental resources (e.g. plants, animals, air, water, soils) that combine to yield a flow of benefits to people”.
Natural capital is part of the ‘Five Capitals’ sustainability framework which aims to support consideration of sustainable development in systems which attach economic value to different forms of ‘capital’ – across natural, human, social, financial and manufactured capital. The concept is essentially designed to enable the valuation of different forms of assets, so that they can be effectively considered in decision-making – and crucially, to seek to address the historic undervaluation of natural assets.
The International Union for Conservation of Nature (IUCN) states :
“Natural capital is often overlooked: if too much is taken from a financial system we end up bankrupt or owing a debt. The natural world is the same. If we continue to take without replenishing stocks or allowing nature to recover we could end up with ecosystem collapse.”
Natural capital is recognised as ‘infrastructure’ by the Scottish Government in Scotland’s Infrastructure Investment Plan:
“Scotland’s natural capital is fundamental to our economy and our wellbeing. It supplies the energy and resources on which many industries depend and is the essence of our global brand. It supports our health and quality of life, providing the essentials we all need to survive and thrive, and protecting our communities from flooding and extreme weather. It plays a vital role in tackling climate change – removing carbon from the atmosphere and securing it in natural habitats. Natural areas or systems that are managed to provide multiple benefits for the environment and human wellbeing can be described as ‘natural infrastructure’.
Investment in natural infrastructure creates significant opportunities for improving biodiversity and reducing emissions, while also creating jobs and a wide range of health and wellbeing benefits, including improved urban air quality and protection from flooding.”
Natural capital is also a National Indicator within Scotland’s National Performance Framework (NPF) and is measured through the Natural Capital Asset Index (NCAI), a tracking tool made up of data on the health of terrestrial ecosystems (due to be updated in May 2024).
What is natural capital finance and why is there a demand for it?
The IUCN defines natural capital finance as any investment “to conserve the value of the natural environment for the long term”.
It is not a clear-cut term and can be used to describe both public and private investment in natural capital, for example, public investment through government grants. It is broadly accepted that it is appropriate to fund climate and biodiversity actions with public money, given that the aim is to deliver ‘public goods’ such as a healthy environment, stable climate, and functioning ecosystems, that markets and systems can fail to deliver or ‘under-supply’ without that intervention.
However, increasingly the term is used to describe private investment approaches – such as investment in woodland or peatland carbon projects through the purchase of units of sequestered or avoided emissions, known as carbon credits. As with public funding, private funding for natural capital projects in the context of carbon or other emerging ecosystem-service markets may also be seeking to address an ‘under-supply in public goods’.
There is interest across government, the third sector and private sectors, and from land managers and communities, in how the use of private finance can be ‘scaled up’ to help tackle the twin climate and nature crises.
Market and certification mechanisms to monetise carbon benefits are generally more developed and are the focus of this blog. However, natural capital finance approaches are also being explored and developed (and in some countries established) to support the delivery of other non-carbon ‘ecosystem services’ such as biodiversity and natural flood risk management.
How much investment in Scotland’s natural capital is needed – and where should it come from?
The Scottish Government has clear ambitions to grow private investment in natural capital, linking this to net zero, biodiversity and economic goals.
One of the aims set out in Scotland’s National Strategy for Economic Transformation (NSET) is to “strengthen Scotland’s position in new markets and industries, generating new, well-paid jobs from a just transition to net zero”. Workstreams set out to support this include “establishing a values-led, high-integrity market for responsible private investment in natural capital”. This is repeated as a priority action in the Scottish Biodiversity Strategy.
The evidence on the twin climate and nature crises clearly shows a need for transformative approaches to restoring and protecting Scotland’s natural capital. NatureScot’s most recent State of Nature Report shows that Scotland currently ranks in the bottom 25% of all nations for biodiversity. Scotland’s Biodiversity Strategy underlines that “delivering a nature positive future for Scotland requires a multi-sectoral, whole of society approach”.
GHG emissions from land and land-use are also significant – accounting for 38% of total emissions, and (combining Agriculture and Land-use, Land-use Change and Forestry) are the single biggest emitter in Scotland[1].
The following figure uses the most recent Scottish GHG Statistics to show sources and sinks of emissions in Land Use, Land Use Change and Forestry, Scotland, 2021.
Woodland creation and peatland restoration targets are key Scottish Government policies for increasing natural capital and meeting climate targets. Both are associated with significant public funding. However, there are challenges meeting these targets:
- Scotland has missed its peatland restoration target – set in the Climate Change Plan update (CCPu) to restore 20,000 hectares of peatlands each year – for 5 consecutive years. In 2022-23, an estimated 7,000 hectares of peatland were restored as part of the Scottish Government-funded Peatland ACTION programme. Restoration rates have almost doubled over the last six years, but the current rate needs to nearly triple to meet the target.
- The CCPu sets out an ambition to increase woodland creation from a target level of 12,000 hectares annually in 2020/21 to 18,000 hectares in 2024/25. Just over 8,000 hectares of new woodland was created in 2022/23, meaning Scotland needs to more than double this rate to reach its target. The budget for woodland grants was significantly cut (by 41%) in the 2024-25 Scottish Budget.
The Climate Change Committee, in its 2023 Adapting to Climate Change progress report for Scotland identified as a ‘highest priority’ action, the need to “Identify barriers to achieving current peatland targets and consider financial incentives or facilitating private investment in peatland restoration”.
More broadly, there have been attempts to quantify the overall ‘finance gap’ for nature in Scotland and the UK. The most prominent estimate by the Green Finance Institute, to meet a range of environmental policy objectives set by governments, is between £15 billion – £27 billion.
Other studies have attempted to quantify the funding required for rural land use in order to meet UK and devolved government objectives. A 2023 assessment of the financial needs for environmental land management, commissioned by the RSPB, Wildlife Trusts and National Trust, estimates that UK and devolved governments must invest at least £4.4bn a year (£1.17bn per year in Scotland) in nature and climate-friendly farming to meet environmental commitments.
Whether, to what extent, and via what funding mechanisms these costs should be borne by the public or private sectors, is a subject of increasing debate.
There is an argument that private finance is needed because there is not enough money in the public purse to meet the scale of the challenge – though some have questioned the estimates made by, for example, the Green Finance Institute.
Others have also have drawn out the risks and challenges with private finance – for example:
- who benefits from private investment in Scotland’s natural capital?
- how are projects and investments regulated?
- who gets a say in how land is used?
These issues are the focus of subsequent blogs.
How does natural capital finance work?
The next (second) blog in this series explores the certification frameworks currently in place, principles for responsible investment in natural capital, and a pilot project for public/private finance in this area.
Anna Brand, Alexa Morrison, Alasdair Reid, SPICe Research
Image sourced from Creative Commons.
[1] Headline emissions from Land-use, Land-use Change and Forestry (LULUCF), amount to just 1% (0.4MtCO2e), however, this is a net figure and includes large emissions and equally significant “sinks” which remove carbon dioxide from the atmosphere (known as sequestration). Detailed datasets show that forestry and harvested wood provide the majority of sequestration, with emissions from cropland, grassland, settlement (land-use change), and wetlands. When considered in detail, land-use sources emit 12.3MtCO2e and absorb 11.9MtCO2e. Presenting LULUCF figures as “net” (emissions minus sequestered emissions) suggests that these are cancelled out, however they are not. For example, forestry in the south of Scotland does not stop emissions from peatlands in Caithness. When land use sinks are filtered out, Agriculture and land use sources combine to contribute 20.1MtCO2e (38%) to Scotland’s total GHG emissions, making land and land use the single biggest emitter.