Financing Nature
Recovery UK
Case studies
Learn more about some initiatives and projects that can provide useful insights to delivering the Financing Nature Recovery UK initiative.
Private finance for peatland restoration and woodland creation in the Scottish Borders
The Talla, Gameshope, Carrifran and Corehead peatland restoration project is progressively restoring intensively grazed hill ground and associated upland valleys to their natural state.
Piloting a Catchment Market in the West of England
The Bristol Avon Catchment Market is a marketplace for buying and selling local, high-impact and verified nature-based projects and the Environmental Services they deliver.
The market aims to drive investment in strategic nature-based solutions in way that helps businesses meet their environmental goals, and landholders secure a sustainable income from environmental projects on their land.
Outcome-based Environmental Regulation – the need for a different approach to regulation
In response to the scale of England’s environmental challenges and the cost-of-living crisis, Frontier Economics and Wessex Water have proposed a shift to Outcome-based Environmental Regulation (OBER) for the water sector.
The OBER proposal recognises that water catchments are subject to multiple market failures and that environmental regulation in the water sector is:
- fragmented across different sectors;
- prescriptive;
- output focused; and
- not based on systems thinking.
OBER is based on developing outcome-based measures and setting targets that enable water companies to deliver the most efficient solutions across all outcomes and develop appropriate funding and incentive mechanisms to support delivery. They propose a regulatory “sandbox” to test OBER in the next regulatory cycle from 2025-30.
White Certificate Markets – The importance of quantifying and certifying outcomes.
When competitive markets for electricity were created around the world in the 1990s, they were designed to promote efficient electricity supply. It was assumed that consumers would respond to the price of electricity by reducing their demand where it was efficient for them to do so. However, the value of investment in energy efficiency was hard to capture as many of the benefits of energy efficiency flow to other users from the lower cost of transmission and distribution, and to society more generally through reduction in greenhouse gas emissions. In addition to these ‘positive externalities’ the cost of identifying and implementing energy efficiency measures for individual consumers was very high – even for large energy users, due to a lack of access to information and expertise.
In 2005, Italy created the world’s first ‘white certificate’ scheme to promote investment in energy efficiency in the electricity market. The scheme established a demand for increasing levels of energy efficiency and introduced a standardised approach to quantifying and certifying energy efficiency projects and activities. Trade in white certificates takes place on a dedicated platform. The public company, Gestore dei Servizi Energetici (GSE) operates the market and carries out monitoring, verification, and control activities. Over its first 12 years, over 56 million white certificates were traded which represented 62% of the emissions reduction in electricity industry. Similar schemes also operate in other countries including France and Australia.
As was the case with energy efficiency, nature benefits us all, but current mechanisms do not properly reward investment in its conservation, restoration, and enhancement. As a result, we are systematically underinvesting in nature and its restoration. In the absence of an efficient market framework, the cost of quantifying the environmental services delivered by nature will be very high, and there are limited incentives for innovation in nature restoration.
Nutrient Neutrality – the need for efficient market mechanisms
Across the UK local planning authorities have an obligation to ensure that new development does not impact on Natura 2000 protected sites. Nutrient pollution is a major problem across a number of these sites. In England, developers are required to demonstrate that new housing will not impact on these sites by increasing nutrient loads discharged from existing water treatment facilities. Typically, this requires developers to deliver nutrient mitigation as a condition of planning approval. Agricultural land use change, and nature-based projects such as the creation of wetlands and woodlands are potential sources of nutrient mitigation.
However, in most areas there is no market mechanism that facilitates the supply of nutrient reduction credits. Although guidance is available, there are also no standardised methods for quantifying mitigation from nature-based projects that can reduce nutrients from the catchment. And there is no accreditation body that can certify the mitigation from projects to provide assurance to Local Planning Authorities.
Consequently, the House Builders Federation estimates that the construction of up to 100,000 homes may be delayed, and across England developers face long, complex, and costly processes to obtain planning approval. Furthermore, where suppliers of mitigation have received approval, they are able to charge very high prices for nutrient reduction credits, and potentially large areas of agricultural land may have to be taken out of production if nature-based projects that can be integrated with agriculture are not approved.
Harnessing market forces to restore nature is not without risk. However, lessons learnt from international and domestic experience can inform market design, governance, and operation, to ensure that these risks are effectively managed and create confidence for both investors and the community.
Market conditions that will facilitate private investment include clear and legally binding targets, well defined and approved technical standards, and efficient mechanisms to accredit both market participants and project delivery, supported by independent institutions with responsibility for market governance, including auditing the performance of market participants.
Agriculture Biodiversity Stewardship Market Act 2022 - The importance of independent market governance
In 2011, Australia passed legislation to provide a legal framework to enable land managers to earn carbon credits by changing land use or management practices to store carbon or reduce greenhouse gas emissions. In addition to setting out the market rules, the legislation established an independent statutory authority responsible for developing the technical rules, administering the scheme, and making emissions reduction purchases on behalf of the government. In 2020/21, the Market for Australian Carbon Credit Units (ACCUs) was estimated to be $226 million (AUD).
Building on the success of the ACCU market, in 2022 new legislation was introduced to provide a nationally consistent framework to describe and verify biodiversity benefits, create a new form of tradeable personal property in the form of a biodiversity certificate and establish assurance and compliance systems to provide market certainty.
Key features of the new legislation include:
- a fit and proper person test for market participants
- biodiversity integrity standards
- protocols that set out how a biodiversity project is to be carried out and the circumstances in which a biodiversity certificate will be issued for a project
- the legal status of biodiversity credits and the process for transferring credits
- powers to audit project proponents and take enforcement action for non-compliance, including issuing civil penalties
- the capacity for the government to purchase biodiversity certificates
The scheme will be overseen by the same independent statutory authority that oversees the ACCU market.
Scottish Interim Principles for Responsible Investment in Natural Capital – government setting the agenda
Scotland has recognised that the transition to net zero and nature positive will have impacts on businesses, communities, and individuals. By publishing its Interim Principles for Responsible Investment38 it is both promoting dialogue and setting the agenda for responsible investment in nature-based projects in Scotland.
The Interim Principles highlight the importance of investment that:
- delivers integrated land use
- delivers public, private and community benefit
- demonstrates engagement and collaboration
- is ethical and values led
- is of high environmental integrity
- supports diverse and productive land ownership
Decarbonising the UK economy
The UK was the first major economy to legislate a net zero target by 2050, with Scotland committing to achieve the target by 2045. However, reaching the target requires extensive, systematic change across all sectors of the economy.
The UK’s legally binding targets for de-carbonising the economy could not be achieved without establishing transmission mechanisms to drive investment in cleaner energy supply, through for example renewable electricity generation.
As a result of these transmission mechanisms, emissions from the electricity sector fell by 62% between 2008 and 2018, with low carbon sources increasing to over 50% of total generation.
Translated through the mitigation hierarchy, these targets have generated an industry supplying carbon mitigation projects, such as improving industrial and building energy performance, and distributed renewable energy technologies.
Drinking Water Regulation
The legislative and regulatory framework for drinking water in England provides an example of an outcome focused, risk-based approach to regulation.
Under section 68 of the Water Industry Act 1991, water suppliers have a statutory duty to supply ‘wholesome water’. Wholesome water is defined in regulation in relation to prescribed concentrations of values of various properties, elements, organisms, and substances. The risk management process water companies are required to follow is also prescribed. However, water companies are then able to use their expertise and technology to decide how best to meet these standards, taking into account the consequences of contravention and the Drinking Water Inspectorate’s enforcement policy.
Northern Ireland Climate Change Bill – sector targets and transition support
Northern Ireland has established a legally binding target of net zero by 2050, which will require widespread adoption of low-carbon farming practices and better farm productivity. It will also require more than half of the 240,000 hectares of peatland to be restored.
The Northern Ireland legislation also provides a Just Transition Fund for Agriculture to provide financial assistance to the sector in recognition of the significant role that change in the agriculture sector will play in achieving the net zero target.