Introduction
The role that Scotland’s land will have to play in achieving net-zero greenhouse gas emissions (GHG) by 2045 is significant.
This is the second blog in a series looking at mechanisms designed to encourage investment in Scotland’s natural capital, how natural capital finance works, and what the key issues are. The first blog considered what natural capital and natural capital finance is, and why there is a demand for it.
This blog sets out what the key UK and Scottish frameworks are for certifying and trading carbon credits from land-based projects – the Peatland Code and Woodland Carbon Code – and describes Scottish Government and wider public sector policies and involvement in this area.
The Scottish Government is supportive of the growth of natural capital finance in Scotland as a way of helping to meet peatland restoration and woodland creation targets – targets which are not currently being met (set out in more detail in the first blog in this series).
The Climate Change Plan update commits to increase the woodland carbon market y at least 50% by 2025. More recently, the Scottish Government’s Biodiversity Strategy and draft Delivery Plan published in 2023 sets out an objective to:
“Establish a values-led, high-integrity market for responsible private investment in natural capital. This will include continuing to develop and enhance the woodland and peatland carbon codes to attract and assist additional investment and develop other codes where appropriate.”
Key existing initiatives: Peatland and Woodland Carbon Codes – how they work
The Peatland Code and the Woodland Carbon Code are separate UK certification frameworks, used to provide assurance that projects meet minimum standards, particularly in relation to quantifying and delivering carbon benefits. The Codes allow carbon credits to be issued which projects can sell to fund woodland creation and peatland restoration. One verified carbon credit means that one tonne of CO2 or CO2e has been removed from the atmosphere or one tonne of CO2e emissions has been avoided. CO2e refers to CO2 equivalent, as Peatland Code projects account for GHGs such as methane in addition to CO2.
The Peatland Code and Woodland Carbon Code are ‘voluntary’ carbon standards – there is no formal regulatory framework governing their operation and they sit outside the formal ‘compliance’ carbon markets established under UN climate treaties, where carbon credits can be used to meet national-level emissions reduction targets or within regulated emissions trading schemes. Voluntary carbon standards have tended to develop in order to generate carbon credits for businesses and individuals looking to voluntarily offset their emissions, or more generally for corporate social responsibility.
The Peatland Code is hosted by the IUCN, a non-profit organisation. According to the Projects Summary webpage, as of 19 February 2024 there are 196 projects under development in Scotland, 72 have been validated and 19 ‘restoration validated’ – where restoration activities have been independently assessed. No projects have yet been verified, where the condition of the peatland is independently assessed at year 5.
Scottish projects are mainly concentrated in the northwest although there are several projects in other areas. The net area of projects under various stages of development is shown to be 39,849 hectares.
The Woodland Carbon Code Secretariat is provided by Scottish Forestry on behalf of forestry agencies in other parts of the UK. A map of projects at verified and validated stage can be accessed on the Code website. Scottish Forestry states there are around 500 Woodland Carbon projects in Scotland and over 5,000 hectares of new woodland in Scotland were validated in 2022-23, a 33% increase on the previous year.
Both codes have requirements in areas common to carbon standards, such as the methodology for quantifying carbon benefits, how projects should be independently validated and verified, how aspects such as permanence and additionality should be secured and how double-counting of carbon benefits should be avoided.
A practical difference between them is that the Woodland Carbon Code generates credits through carbon sequestration from woodland creation, while the Peatland Carbon Code generates credits from sequestration in peatlands and avoided emissions by restoring otherwise degraded (and therefore emitting) peatlands.
‘Additionality’ refers to ensuring that the carbon credit being generated is over and above what would have happened anyway, without the intervention of the project and associated revenue. A Scottish Land Commission Discussion Paper on Carbon Markets notes:
Both codes contain explicit tests to identify the ‘additionality’ of proposed projects. The main requirement under the two codes is financial additionality. This means, simply put, that emissions reduction would not be possible to achieve without the income from carbon trading. This is a tricky test to implement, given the inherent flexibility of profitability forecasts, and the difficulty of identifying verifiable baselines and alternatives that these tests rely on. This additionality requirement is particularly relevant in understanding the interaction between carbon trading and commercial forestry.
‘Double-counting’ requirements are designed to avoid carbon benefits being ‘claimed’ by multiple people, projects or organisations.
‘Permanence’ is particularly important for land-based projects where carbon benefits could be reversed. A key mechanism of ensuring delivery of carbon benefits in land-use carbon standards is often the requirement for a ‘risk buffer’. In both the Woodland Carbon Code and Peatland Code, projects are required to contribute a proportion of expected carbon credits to a buffer account, which then acts to provide an increased level of assurance of carbon benefits across the standard as a whole.
Both Codes use a shared UK Land Carbon Registry for the issuance and tracking of carbon credits.
Both Codes issue credits before the carbon saving is realised (‘ex-ante’ credits) in the form of Pending Issuance Units (PIUs). PIUs are converted into verified carbon credits (‘ex-post’ credits) over time once the actual emissions reductions are realised and verified, becoming verified Woodland Carbon Units (WCUs) or Peatland Carbon Units (PCUs). Issuing PIUs creates a commodity from project activities at an early stage, that can be traded and tracked through the registry. Companies might purchase PIUs for a range of reasons – for corporate social responsibility, as an investment in their future value, or to offset their emissions at the point they become verified carbon credits. The Figure below summarises the approval and issuance process under the two codes.
What impact are these standards having?
The Scottish Government published estimates of private investment in natural capital in Scotland in December 2023. The Table below shows estimates of private investment in each of the past five years in woodland creation and peatland restoration. Private investment in both standards has increased over time, but remains at relatively low levels (compared to public grants for example). The figures show the market for woodland carbon is currently larger than that for peatland carbon.
Year | Woodland (estimate) | Peatland (estimate) |
2018-19 | £3,130,056 | £19,018 |
2019-20 | £6,866,424 | £0 |
2020-21 | £5,748,912 | £238,171 |
2021-22 | £2,898,360 | £268,346 |
2022-23 | £9,549,648 | £1,659,425 |
The Scottish Government CCP monitoring report for 2023 states there has been a “rapid rise in registrations under the Woodland Carbon Code” indicating “a major increase in activity in the coming years.”
Development of principles to guide responsible investment and proposed ‘market framework’
The Scottish Government and other organisations have sought to set out principles and protocols to guide responsible private investment in natural capital, identify opportunities for multiple benefit and mitigate potential risks (discussed in more detail in the third blog in this series).
In 2022 the Scottish Government published Interim Principles for Responsible Investment in Natural Capital. The principles set out “ambitions and expectations for a values-led, high-integrity market for responsible private investment in natural capital to communities, investors, landowners, public bodies and other market stakeholders”.
The principles include for example, that investment should deliver integrated land use, public, private and community benefit and deliver investments of high environmental integrity.
The Scottish Land Commission subsequently published a Responsible Natural Capital and Carbon Management Protocol in 2023 which set out “practical expectations for new and existing landowners, managers and investors to ensure that their approach to natural capital and carbon management recognises their responsibilities, as well as their rights, in relation to land and contributes to a just transition”.
In relation to community involvement for example, it states:
Landowners and managers should work with the local community to identify opportunities to share the benefits from the management of natural capital and carbon with them and to support local priorities and aspirations. It is recommended that landowners and managers consider opportunities to contribute to community wealth through procurement, fair work, and inclusive ownership. It is recommended that the establishment of a community benefit fund to provide direct financial returns to local communities is considered.
The Scottish Government’s 2023-2024 Programme for Government includes a commitment to publish:
…proposals for a market framework that strengthens the interim principles we set out in 2022, to help meet our climate change and biodiversity goals, support communities, and align with a just transition.
Public sector projects to encourage private investment
NatureScot, Scotland’s statutory nature body, states that in addition to public funding “a huge increase in private funding is also needed to tackle the twin nature and climate crises”.
In March 2023 NatureScot announced a private finance investment pilot that it stated “could mobilise £2 billion in landscape scale restoration of native woodland, create new jobs and support rural communities across all parts of Scotland.” It has signed a Memorandum of Understanding with financial partners – a UK private bank, investment firm and a “global impact” firm – and has published a list of Frequently Asked Questions about the partnership.
The first pilot scheme, Wild Heart Borders Forest Trust, began in 2023 and NatureScot states there is potential for around 30,000 hectares of new native woodland and “between £200 and £300 million of private investment”.
NatureScot also launched the Facility for Investment Ready Nature in Scotland (FIRNS) in 2023 in partnership with the Scottish Government and National Lottery Heritage Fund. The programme awards grants to projects which will “help develop a viable business case and financial model” to attract investment in natural capital.
Furthermore, the Scottish National Investment Bank (a public body) has committed £50 million over five years to the creation of new woodland and forestry management in Scotland. This investment has been made with the asset management company Gresham House and primarily targets traditional commercial forestry operations, however, the Bank states that it will also:
[…] aim to generate carbon credits in the form of Woodland Carbon Units (WCU) which will create additional value or be used to offset carbon emissions on a voluntary basis.
Recent analysis by former MSP Andy Wightman suggested Gresham House is now the fifth largest private landowner in Scotland owning nearly 54,000 ha of land in 161 separate landholdings.
The Scottish Government has also recently agreed a Partnership Agreement with the City of London which undertakes to “promote and strengthen Green Finance” as a priority area.
Other emerging natural capital finance approaches
The Peatland Code and Woodland Carbon Code represent the majority of current activity in natural capital finance in Scotland in terms of investment and on the ground activity. This reflects the broader picture globally – voluntary carbon markets are relatively well-established and international in nature, with multiple standards operating and competing.
However, other approaches can seek to quantify and value ‘ecosystem services’ other than carbon benefits. In particular, at a global level there are ‘emerging markets’ for biodiversity credits – notably including a new market for statutory biodiversity credits as part of the planning system in England – and there is growing interest in what other financing or fiscal ‘tools’ could help to tackle the significant task of reversing biodiversity decline.
There are also approaches being developed to expand UK voluntary carbon markets beyond existing woodland and peatland standards. For example, a consortium led by the UK Centre for Ecology and Hydrology (CEH) is working to develop a UK Saltmarsh Carbon Code, with aims of driving climate, biodiversity and coastal adaptation benefits through restoring lost coastal saltmarsh. Similarly, a 2023 research project explored the potential for an Agroforestry Carbon Code. Community Land Scotland is involved in the development of a Community Benefits Standard through the Nature Finance Certification Alliance, which aims to focus on community wealth building and a just transition to net zero.
These diverse areas of natural capital finance development are not covered in detail in this blog series. However, it should be noted that there is extensive interest in ‘beyond carbon’ approaches in Scotland. Networks in Scotland such as Nature Finance Pioneers and the Scottish Forum on Natural Capital have developed in recent years to act as a space for collaboration between NGOs, academia, private sector actors and Government agencies in this area.
What are the key issues for natural capital finance?
The next (third) blog in this series highlights some of the most prominent sites that have been bought for natural capital finance recently, sets out some of the key issues and questions that have arisen, summarises research into land market impacts, and sets out parliamentary scrutiny to date.
Anna Brand, Alexa Morrison, Alasdair Reid – SPICe Research