Emerging carbon markets available to farmers in Scotland

16 August 2023

What are carbon markets?

Carbon markets are trading systems that buy and sell carbon in the form of carbon credits. A carbon credit refers to one tonne of carbon dioxide or equivalent greenhouse gas sequestered or avoided. The transfer of carbon credits has arisen due to the demand from private companies to meet NetZero. Where companies find there is no further way they can reduce their own greenhouse gas emissions (called insetting), they can purchase carbon credits to offset remaining emissions.

Carbon credits have allowed private investment in land-based projects that focus on sequestering carbon (e.g. woodland creation), or preventing further greenhouse gas emissions (e.g. peatland restoration). There are two broad carbon markets: compliance and voluntary. Compliance carbon markets are created when policy or regulation is implemented at a regional, national or international level targeted to regulate and reduce greenhouse gas emissions. Voluntary markets can again be at a regional, national or international level, but these exist on a voluntary opt in basis. Demand comes from private investors who want to compensate their carbon footprint to meet internal sustainability targets, improve public relations, or for accreditation purposes.

A range of carbon markets exist globally which have different levels of guidelines, standards and validation to produce a carbon credit. Standards that are underpinned by robust measurement, reporting and verification procedures provide greater confidence in the carbon credits being sold, meaning these credits fetch a higher price. Markets governed by reputable bodies such as the Woodland Trust and IUNC give further confidence to buyers that carbon credits are legitimate.

Landowners can choose which market they want to enter, based upon what suits their business aspirations. Within Scotland, the two most established and verified markets include the Woodland Carbon Code, and the Peatland Code.

The future of carbon markets

The buying and selling of carbon in a voluntary market has grown significantly in the UK in recent years. With continuing pressure for both the private and public sectors to reduce emissions, carbon markets in one form or another are likely to keep growing. The Woodland Code and the Peatland Code offer standardised, reputable carbon markets that landowners can enter to have their carbon sequestration or carbon emission reductions quantified and translated into carbon units. Whether land managers want to sell these units to individuals looking to offset emissions or keep the credits themselves to inset their own emissions, is a decision for them to make.

Many companies are moving towards insetting emissions within their supply chain rather than paying to offset them. Not all sectors are able to reduce their total emissions to zero, and offsetting is likely to continue. By directly tackling emissions, insetting is definitely preferred and the movement to inset will always be required. The push for food producers to inset via their supply chains is likely to impact on landowners, and having validated carbon units at your disposal may become useful.

When selling carbon units, a carbon sales contract will be required. Therefore, a robust legal agreement is needed to protect the seller and the buyer. Legal advice should be sought out to ensure this is achieved. Furthermore, the rights to carbon remain with the buyer, so if the property is sold it passes to the new owner. The new owner will then be responsible for the carbon contract with all of its binding restrictions.

For landowners wishing to tap into carbon markets it is important to ensure that the project, be it woodland creation, or peatland restoration, adheres to the Woodland Carbon Code or Peatland Code. To validate carbon credits there is typically a need to demonstrate that the carbon captured is legal, permanent, and additional. Additionality means that the project would not have gone ahead without carbon finance. This could be due to legal requirements (e.g. requirement to replace woodland lost due to development) or financial reasons (e.g. creation of a Sitka spruce plantation for commercial purposes).

Woodland Carbon Code

The Woodland Carbon Code (WCC) is a quality assured standard for woodland creation projects in the UK to create carbon credits. In Scotland, the scheme is administered by Scottish Forestry. Essentially, the code allows the owners of new woodlands to calculate the total carbon sequestration that their woodland will achieve over the lifetime of the trees. Project duration can be up to 100 years, though many projects register for a shorter time period (such as 40 years for a conifer project managed on a 40-year rotation, or 65-70 years for native woodland projects). The duration of the project will determine the amount of carbon sequestered and ultimately the carbon units created.

To ensure that carbon credits claimed by the woodland creation meet the standards of the code, it must be measured, reported and validated by an independent third-party. The WCC was developed by the Forestry Commission in partnership with the Woodland Trust and Department for Environment, Food and Rural Affairs, and is endorsed by the UK Government as a leading standard for carbon capture through woodland creation in the UK.

The first step is therefore to register the project. This must be done before establishment works and planting begins. To register, projects need to provide information regarding the location, area, ground preparation, species mix of the proposed planting, and the project length (between 35-100 years). This information is entered into the UK Land Carbon Register which is a public environmental registry under the Woodland Carbon Code. Once this is complete, a predicted number of carbon credits will be calculated.

The next stage is validation. This is complete by an approved third-party validation and verification body who check documentation to see if the new woodland creation is legal,

permanent, and additional. It is important that this information is captured prior to woodland creation. Additionality is tested in two ways: the legal test and the investment test.

Legal test refers to whether there are any laws, planning decisions or other legally binding agreements that require the woodland to be created. In such instances the woodland is not additional. With regards to planning decisions, woodland creation may be deemed additional and thus eligible if its creation:

a) Is one of many environmental solutions and woodland creation is not specifically required.

b) Is not compensatory planting to replace areas of woodland felled.

c) The income from the developer doesn’t rule the project out under the investment test.

The investment test demonstrates that without carbon finance, woodland creation is either:

a) Not the most economically attractive option for that area of land (i.e. woodland creation is less profitable than grazing).

b) Not economically viable on that land at all (i.e. woodland creation is not profitable).

Checking if the woodland creation is additional must demonstrate that without carbon finance, the project would not be financially viable. Projects with other sources of income, such as government grants, timber income or charitable donations, are eligible provided the investment test is passed. For example, the creation of a Sitka spruce plantation for commercial purposes is unlikely to be pass the investment test. Furthermore, validation ensures that the carbon sequestered from the woodland project is greater than the carbon sequestered from the land’s previous use. Validation determines the predicted number of carbon credits generated by the new woodland known as Pending Issuance Units (PIUs). These can be bought and sold but cannot be used by a company to offset emissions as the woodland hasn’t actually sequestered any carbon yet. They can only be bought by companies looking to offset future emissions.

The final stage is verification, where after 5 years, and then every 10 years after that, the woodland project is verified by a third party. As the woodland develops, Pending Issuance Units are converted into Woodland Carbon Units which reflect the actual amount of carbon sequestered.

Peatland Carbon Code

The Peatland Code is similar to the Woodland Carbon Code, in that it provides a standard to comply when undertaking peatland restoration projects to enable landowners to receive carbon credits. Peatlands store a massive amount of carbon, in good condition this carbon is stored in the ground, and the peatland continues to sequester carbon. However, when peatlands dry out, and bare peat is exposed, they emit carbon. Approximately 80% of Scotland’s peatlands are currently degraded, emitting approximately 20% of Scotland’s total greenhouse gas emissions. Peatland restoration therefore aims to restore peatlands to stop these emissions. The Peatland Code issues carbon units based on the reduction of carbon emissions achieved through peatland restoration following a similar structure to the Woodland Code of Registration, Validation and Verification.

Peatland restoration must first be added to the UK Land Carbon Register under the IUCN Peatland Code. To accompany this a site survey is required to assess the peatland’s eligibility, alongside a restoration plan and timescale (minimum 30 years), and a calculation of the reduction of carbon emissions. For peatland to be eligible it must be actively eroding, drained and modified, and have a minimum peat depth of 30 cm.

Following this, an approved third-party validation and verification body validates the project. This requires documented evidence that the peatland restoration is legal, permanent and is additional. Though additionality means that carbon income should be the only financial driver for the restoration, other funding streams such as Peatland Action funding can partly cover the costs of restoration works of projects registered with Peatland Code. At the time of writing, non-carbon income (that can be a public grant or other private income) can cover up to 85% of peatland restoration works and management costs, with the remaining 15% of the funding coming from carbon finance. At this stage, PIUs are issued which predict the number of carbon units the restored peatland is expected to yield. These PIUs work in the same way as the Woodland Code.

Once restoration works are complete, third party validation will check that restoration was carried-out in line with the project plans. Then 5 years after the restoration has been completed, and every ten years after that for the duration of the restoration, it is verified by a third party. Each verification PIUs are converted into Peatland Carbon Units (PCUs) for the assessment units where the restoration works resulted in the predicted improvement of the peatland’s condition. These PCUs represent the reduction in carbon emissions that have been achieved in the last 5 or 10 years. The PCUs can be purchased by anyone looking to immediately offset their emissions. The projects will have a clearly defined duration. The duration can be a minimum of 30 years, and a maximum of 100 years, however this 100 year maximum can only be reached where there are peat depths of >100cm. Where peat depths are below this, the cm depth will determine the maximum duration of the project.

Emerging Carbon Markets

Alongside the existing carbon codes, there are many other emerging carbon markets being trialled across the UK. These operate in the same format as the Woodland Code and Peatland Code but are achieved through alternative land management practises.

Hedgerow carbon code

The Game and Wildlife Trusts are trialling a Hedgerow Carbon Code on three arable farms in England. They are developing a tool to enable the carbon stored in a hedge to be calculated and verified. The code is currently under development but could offer an alternative stream of funding for hedgerow creation/restoration, proving that the creation is additional, and the carbon sequestered is accurately calculated.

Soil carbon code

The concept of soil carbon is one gaining traction in the rural sector. Land management practices can be employed to build soil carbon, which could be sold as credits to investors willing to fund these changes to claim credits and offset emissions. At present, no soil carbon market exists, however many soil carbon schemes are actively used by farmers in the UK. This includes ‘Soil Capital Carbon’ where entrants enrol their arable unit and management practices into a farm carbon calculator. Here no practices are compulsory, but advice is provided, and certificates are provided for carbon removals and emission reductions. After verification farmers are paid based upon the perceived emission reduction and sequestration. The process here is less strict than some of the existing codes mentioned above, which may be more appealing to some landowners, but may also have a narrower market of potential buyers of carbon credits.

Agroforestry code

Agroforestry is the integration of trees into productive agricultural land instead of simply having woodland blocks. The Soil Association, Woodland Trust, Finance Earth, Organic Research Centre and Scottish Rural College (SRUC) are currently exploring the feasibility of developing a carbon code for agroforestry. This could allow for carbon funding to be achieved without taking fields out of agricultural production.