Carbon markets are fast becoming an essential consideration for UK landowners and their businesses. But trading tonnes of an invisible gas isn’t always intuitive, especially for more traditional, commodity-based rural businesses.
There are two types of carbon that landowners can sell: woodland and peatland. Both are governed by their own standard, the Woodland Carbon Code and the Peatland Code respectively. These standards provide the regulation and transparency that is required for buyers of carbon to engage with these markets.
Both codes operate in a similar fashion, requiring land managers to conform to the key principles that underpin carbon offsetting across the world. Many of these, such as permanence, conservatism and independent verification are unsurprising. However, there is one principle that is often not anticipated or well understood: the concept of additionality.
For a carbon project to be considered additional, it must be able to evidence that it is not financially attractive without carbon funding. In other words, if a landowner believes they would have undertaken woodland creation or peatland restoration in the absence of any income from carbon credits, then their project is not additional and so not eligible for carbon funding.
Additionality is vital to the integrity of voluntary carbon markets. It ensures carbon credits are only ever generated from projects that are delivering a climate benefit over and above what would have happened anyway. It also gives buyers of carbon confidence that their money served a purpose, and didn’t just increase the profitability of a project that was going ahead regardless.
Releasing income from carbon
Assuming a project’s additionality is genuine, the question then becomes “how does a landowner access income from their carbon?”. There are two routes to market: the upfront sale of future carbon, or the future sale of verified carbon.
The upfront sale of future carbon revolves around a product known as a ‘Pending Issuance Unit’ (PIU), which can be thought of as the promise of future carbon. The number of PIUs a project has at its inception is identical to the number of tonnes of carbon dioxide equivalent (tCO2e) that project will sequester over an agreed contract duration. In other words, one PIU equals one future tonne of CO2e. Over time, Woodland Carbon Code and Peatland Code projects undergo successive verifications. The first of these happens five years after the trees were planted or the peatland was restored, with further verifications every ten years subsequently.
The purpose of these verifications is to confirm that a project is on track and delivering the amount of carbon that was agreed at the outset. For woodlands, this involves counting the growing trees, making sure the right number and right species are there, and that they aren’t being damaged by herbivores, disease or extreme weather. For peat projects, it requires a site inspection to ensure the initial restoration remains successful, and no remedial work is required.
After each successful verification, a certain amount of CO2e can be confirmed as obtained. In woodlands, it is now visible as solid carbon in the trunks and roots of the growing trees. At this point, the tonnage that has been verified is converted from PIUs into either ‘Woodland Carbon Units’ (WCUs) or ‘Peatland Carbon Units’ (PCUs).
It is by selling one of these carbon products that landowners generate income from their projects. PIUs can be sold upfront, and the carbon converted into cash at a project’s outset. Alternatively, landowners can wait for successive verifications at years five, 15, 25, etc. to deliver WCUs (or PCUs), which they can then sell on or declare against their own business’s emissions.
The third option is to blend the two approaches, selling some PIUs to generate income upfront, while retaining a portion of the carbon for the future. As with the design and long-term management of the projects themselves, the choice is the landowner’s entirely.
The charisma of carbon
For landowners who can afford to wait several decades, selling WCUs can be lucrative. The most recent Woodland Carbon Guarantee auction, which is only open to woodland creation schemes in England, saw WCUs achieving an average price of £17.31, which compares favourably to the sale price of £6 - £12 currently achieved by most PIUs.
But what drives the prices mentioned above? In the UK, the market is largely voluntary because most businesses are not required to offset their emissions. As a result, it is buyers of carbon who ultimately dictate the market price. Businesses will only pay what they want to for carbon credits because they aren’t mandated to buy any, and cheaper offsets can often be procured overseas.
As a result, what we at Forest Carbon call the ‘charisma’ of a project is often critical to the price its carbon can achieve. Most businesses want to buy carbon from projects with a strong narrative, which will deliver public goods in addition to carbon capture. Rightly or wrongly, this means that carbon from woodlands comprised (primarily) of native species, which enhance biodiversity, mitigate flooding and/or have amenity value for local communities, commands the highest price.
The ultimate take-home message is that the UK’s voluntary carbon market is alive and kicking, growing year-on-year and helping landowners to finance woodland creation and peatland restoration
Combining carbon funding with existing grants can tip the scales of financial viability for many projects. For this reason alone, it is worth engaging closely with this market, to see what it has to offer you.