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  • Harriet Bell

Blended Finance Group Meeting Notes on Carbon & Biodiversity Credits 6/7/2020

As the volunteer farmer Advisory Team work through the Dartmoor ELMs Test and Trial smaller subgroups will explore different elements. The objective of the Blended Finance group is to work with a range of businesses to look at whether there are environmental outcomes they would be willing to pay for; how they might pay for these; whether it would require landscape-scale action by suppliers of such benefits to attract purchasers; and the sort of advice/environmental brokering arrangements that would need to be put in place to deliver such a model.

This was the second meeting of the blended finance subgroup and the focus was specifically at exploring opportunities to draw down investment by trading in either carbon or biodiversity credits.


The group were presented with several options to discus and two papers on on two potential credit brokering companies to consider working with, Forest Carbon and The Environment Bank.


This blog covers:

  • The options and information the group were given ahead of the meeting.

  • The discussion during the meeting.

  • An opportunity for you to feed in your views by submitting your preferences at the end of the blog.


Quick recap on the credit market:


There is now an international system of trade developing around carbon and biodiversity credits (offsetting), one carbon credit permits the emission of one ton of carbon dioxide or emissions equivalent, one biodiversity unit represents a certain level of biodiversity delivered through net gain. What this opens up is an opportunity for those whose businesses sequester carbon or who can enhance biodiversity to sell credits.


A variety of options were presented to the group for discussion and the following papers were circulated in advance:


Option A


Any individual land owner/farmer can submit a project for tree planting, peat restoration, habitat creation etc. to a company offering to facilitate the transaction of credits. It might be a private transaction between a land owner, or landowner and tenant farmer. Alternatively it could be done by a Commons Association who would be responsible for dividing up the money between the commons owner and those with rights.


Pro:

  • Brokering companies have existing systems set up and working.

  • Brokering companies have an existing market.

  • The cost to those selling the credits is minimal, they need to develop a management plan and spend time working through the proposal. So there’s minimal outlay and predominantly it’s a financial return.

  • Credit brokering companies are always going to be looking to create new markets, doing R&D into new options and you can benefit from their R&D.

Con:

  • Smaller projects e.g. individual farms, are of less value for carbon, this seems to be less of an issue for biodiversity.

  • Each individual farm is one among many competing to sell on the market.

  • No opportunity for collective bargaining, value adding or resource efficiency.


Option B


You continue to work with brokering companies as delivery partners but some capital is identified to create a Dartmoor branded user interface. So the process is similar to when you buy “Sainsbury’s” car insurance, for example, the user facing side of the businesses is branded and managed by Sainsbury’s but the insurance policy itself is actually provided by a separate insurance company.


The system is still the same for farmers/land owners/commons associations in that they submit land but there is the option to more actively curate the submissions into more attractive, larger blocks of land e.g. if the value of woodland is greater when it’s connected then someone administering this system could pull together blocks of land or even actively recruit participation where an additional piece of land would be helpful.


Through one user interface you can offer a variety of products e.g. peat, woodland, agroforestry, natural regeneration, wildflower meadows etc.


You can also target market different investors e.g. organisations and individuals interested in offsetting but you could also just use it as a platform for anyone who wants to give money to peat restoration or woodland creation without a need for a return.


Pro:

  • Brokering companies have existing systems set up and working.

  • Brokering companies have an existing market.

  • The cost to those selling the credits is minimal, they need to develop a management plan and spend time working through the proposal. So there’s minimal outlay and predominantly it’s a financial return.

  • Credit brokering companies are always going to be looking to create new markets, doing R&D into new options and you can benefit from their R&D.

  • A Dartmoor branded user face potentially makes those wanting to sell credits on Dartmoor a more attractive and competitive investment choice because of the reputation and prominence of the Dartmoor landscape. Credit brokering companies will have a wide variety of options available to them this empowers Dartmoor land owners/farmers to develop their own markets.

  • A Dartmoor branded user interface enables the collective marketing and promotion of carbon sequestration/biodiversity regeneration on Dartmoor across other channels e.g. Dartmoor beef reared on restored peat etc.

  • More active administration at the Dartmoor end can help accumulate value by bringing smaller land parcels together.

  • Empowered to open the scheme up to financial donations, not just offsetting.

  • “finders fee” available for bringing forward projects to help towards the cost of administration from Forest Carbon.

Con:

  • Upfront investment is required to create the user facing business and to administer.

  • “finders fee” may not be sufficient to cover cost of administration so additional finance may be required from elsewhere to administer the Dartmoor side.


Option C


Create a Dartmoor owned and operated environmental credit broker.


Existing brokering companies are doing the leg work (and have done the leg work to get these systems up and running), advising and supporting the development of sites and submitting them to schemes but there’s nothing stopping new companies developing to do the same thing and dealing directly with the Woodland Carbon Code or the Peatland Carbon Code etc.


Dartmoor could identify an existing business or create a new business (maybe a Community Interest Company or Cooperative) which both recruits Dartmoor farmers/landowners to submit land and then transacts with the credit marketplace directly.


Pro:

  • Creating a new business and employment opportunities on Dartmoor.

  • Full control.

  • The costs could still be kept low for participants.

  • Further strengthens the Dartmoor brand, not just selling Dartmoor’s credits potential but 100% local business.

  • A Dartmoor business enables the collective marketing and promotion of carbon sequestration on Dartmoor across other channels e.g. Dartmoor beef reared on restored peat etc.

  • More active administration at the Dartmoor end can help accumulate value by bringing smaller land parcels together.

  • Empowered to open the scheme up to financial donations, not just offsetting.

Con:

  • Taking on the administration and costs of creating a new business from scratch.

  • No existing client base.

  • Increased upfront costs and probably a slower time lag before projects start to return on investment.

  • If your market USP is that it’s carbon on Dartmoor at some point you are going to run out of a product to sell e.g. all peat will be restored, anywhere appropriate for trees will have them. (Although maybe it could be an all National Parks project?)

  • If one wanted to develop into new markets then it would require investment into R&D.

Option B or C +


For an owner occupier or a tenant and landlord selling carbon credits is a relatively uncomplicated financial procedure. A management plan is developed and, in the case of a tenant and landlord agreed by both parties. That plan is taken to the credit brokering company and they are paid the majority on completion of planting or capital works, with the remainder several years later when the project is verified or on an ongoing basis.


For a Commons the process is slightly more complex because the common owner and those with rights need to agree a management plan and then the distribution of funds (using the existing model for stewardship payments might be appropriate). Whatever has been committed to then needs managing for decades despite the majority of the funds being paid upfront.


It has proposed that what might be best for the Commons, given that a commitment for many years has been made, would be to set up an investment fund which all credit payments could go into and this then pays out annually to the land owner and commoners to cover their ongoing maintenance costs. This prevents a scenario where for a year or two businesses are cash rich but then for the next two decades the costs of management need to be continuously carried out with, depending on the agreement, no or a lesser return.


This is a great idea in principle. However, the downside to investing that money in an external investment fund is that it then leaves the area, sits with a financial institution based elsewhere and could be invested anywhere in the world really.


Another possibility would be for each Commons Association or the Commoners Council to establish their own investment fund and use the investment money to reinvest in Dartmoor in a way which still generates an annual return.


An example of that would be if in addition to either option B or for the business element of option C you also used money from carbon credits to create a Dartmoor community energy company. Rather than have that money managed externally and invested externally members of the community energy company could reinvest that money back into other beneficial farm infrastructure e.g for farmers it could support the creation of a roof for a slurry pit (ticking an ELMs public good box) which also carried solar panels which reduce farm bills and generate a return to the community energy company for reinvestment.


Arguably each individual participant already has the option to reinvest in their farm but again it comes down to maximizing gain through working collaboratively. The returns on the carbon credits from one holding might not be enough to put up a new roof and solar PV however it can be done if funds from a number of holdings are put together. Then over time, as investments start to return, everyone can have the opportunity to access some benefit from the community energy fund.


As the market for other environmental services develops this model could be adapted for water management infrastructure, for example.

Notes from the discussion on the proposals:

  • We need to keep administration costs to a minimum and focus on delivery.

  • In my mind this shouldn’t be ELMs, it should be completely differentiated.

  • I see options for this on home farms, I’m much less certain where this would fit on Commons. I can see a multitude of problems there. I certainly think there will be land owners that will want to take this up as an option. Particularly around carbon.

  • It’s going to be difficult with more environmental elements to understand where to draw the line between ELMs and blended finance. If this is coming then we should explore this. I think we should look at something like the Dartmoor Community Energy company. If you can do it with a Dartmoor wide brand then that gives us a bit more freedom. If this pot of money’s there it would be remiss of us not to look a taking this up.

  • Who owns the carbon on Dartmoor? Presumably for peat restoration most of the money would go to the capital costs? How much of it would then go to the landowner? What is the payment for? [For clarity this information is available in the notes on Forest Carbon discussion further up this blog.]

  • This type of blended finance does not suit us at all because it leaves it up to individual farmers and landlord/owners. We need a framework through Defra to determine and manage consistently the division of payments between farmers and landowners, so it doesn’t become a wild west.

  • If having a Dartmoor brand created a more total income then some people might be happier with it. For the Commons, where would non-graziers fit in? What is the ongoing maintenance? If livestock is still required to manage restored peat then that’s great, if restoring peat results in no livestock we have a problem. I actually wouldn’t rule out silvopasture on commons but it would require a lot of upfront capital. I think a lot of the public would like that. Only in restricted areas though.

  • The way I see it is that on the commons the money will go to the landowner and the broker. On the home farm soil is out so it’s biodiversity and trees but the land owner and contractor are going to be the main winners.

  • If we set up our own company I think you’d need to look a lot wider at who might like to invest. I think there’s an opportunity here, to create employment.

  • The main advantage I can see for having it under a Dartmoor brand is that it enables different people to collaborate to offer a higher value product.

  • If I had to deal with this all myself as an individual farmer I wouldn’t know where to start, having a group or base to demonstrate what’s available would be better.

  • Who polices these brokers? - They deal with existing markets which have rules like the Woodland Carbon Code and Peatland Carbon Code.

Action: Project Officer to find a farmer who has participated in such a scheme for the group to talk to.


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