Jeremy's Blog 6th May: Private Environmental Markets

This article by Jeremy Moody first appeared in the CAAV e-Briefing of 5th May 2022

“Government has set an ambitious new target to raise at least £500 million in private finance to support nature’s recovery every year by 2027 in England, rising to more than £1 billion by 2030.” (Nature Recovery Green Paper, March 2022)

Those are large and round figures. Where might this money come from and why? How might any of this be defined and monitored? The three major current topics each have issues.

Carbon? – With its low price and often small volumes available from typical farm ownerships, should carbon deals be seen as more than serving an advertising purpose if they are to justify the restrictions on the farmer who has sold carbon to others? Even if done to promote, say, ecotourism with a larger income stream, might the farmer not need that carbon for the neutrality of the business itself?

Biodiversity Net Gain? – With wide margins of error and varying over the development cycle, DEFRA reports a possible annual off-site value of £135m. This might see a high unit value for the relatively small areas committed each year to long-term agreements.

Nutrient Neutrality? – Another market being created as an effect of regulation and linked to the release of development values, this might follow the logic of Biodiversity Net Gain in relevant catchments but for even longer-term agreements. Again, it might be achieved more easily on-site.

Each deal bears the burden of transactions costs. These include long-term monitoring and verification to assure the buyer, weighing cost, risk and outcomes, as well as the provision of a buffer, insurance or a lower price to allow for shortfall or failure. The costs of assurance and liability may be reallocated, not avoided, with a farmer consortium – DEFRA will require private finance for Landscape Recovery.

The water companies are established players – preventing pollution being cheaper than removing it afterwards. Buying changes in land management to save cost, rather than for income or capital, respects the mitigation hierarchy of preventing damage before trying to offset its effects.

More fundamentally, farmers are reluctant to sell control over their land and so typically avoid outside equity in their businesses. If serious income streams emerge, owners are well placed to borrow against their land for the investment to unlock them while retaining control. Such a viable income stream might be better from parts of the supply chain or NGOs than private equity struggling with the farming’s small-scale businesses. Meanwhile, farmers own environmental improvement will often matter more than selling control to others.