Carbon and natural capital trading – legal advice for farmers

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When we talk about “trading” natural capital in this article, we are using shorthand for selling products or services derived from natural capital assets.

It is not only a question of selling carbon credits resulting from the fixation of organic matter in the soil.

See also: 6 Soil Carbon Systems Farmers Need to Consider

These can be “units” of biodiversity through the creation of new habitats, nitrogen offsets generated by a wetland project, or reductions in greenhouse gas emissions through the restoration of peatlands.

When it comes to legal considerations, there are four main areas to focus on:

  • What are you selling?
  • Is it yours to sell?
  • How might contracts restrict other opportunities to exploit natural capital?
  • What are the implications of entering into long-term contracts?

What are you selling?

This is an obvious point, but one that may impact your ability to participate in the proposed program or other programs or trades in the future.

You can, for example, participate in a privately funded non-statutory environmental program, agreeing to create pollinator habitat/watercourse buffers/low tillage practices.

In the fine print, there will likely be a clause that gives the buyer (the funder) the right to the “results”.

In other words, you are paid to implement measures, but the buyer buys the results (additional biodiversity, carbon credits, etc.).

Private wood plantation programs can pay you to plant trees, but retain the right to sell the carbon credits generated by the plantation.

Check the information rights you are selling.

Expect, for example, that details of programs falling under any of the official carbon codes will be made public on the UK Land Carbon Registry, and details of any off-site biodiversity net gain programs will be accessible to the public.

Private agreements can even give the buyer access to the film on the farm and release information about your project.

Is it up to you to trade?

This is particularly important if the land is rented, both for the tenant and for the owner.

You will need to check your tenancy agreement and scheme rules to see if and to what extent consent from your landlord or tenant is required before you can accept a natural capital delivery project.

And no matter what the lease agreements say, Woodland Carbon Code projects require consent from the landlord where the project land is leased, with the landlord agreeing to the same obligations as the tenant (for example, replanting if trees fall).

Moreover, it is a basic principle – whether in public or private systems – that you cannot sell the same thing twice.

It’s complex. The government is understandably keen to see private finance for natural capital entering the sector.

Defra’s current position is that it is possible to include the same land in a sustainable agriculture incentive scheme and a private scheme as long as you are not paid for a similar activity or result on the same surface at the same time.

Private systems may have an explicit clause prohibiting double selling and requiring you to guarantee that the particular result you provide is not already paid for by someone else.

Restrict your opportunities

It’s a similar point. If you enter into a privately funded 10-year deal to provide carbon credits or additional biodiversity, you risk limiting your ability to “sell” those results elsewhere.

Again, this may come down to a forensic assessment of what exactly you are being paid for under a particular agreement.

This is still an emerging area, but additional carbon reduction/sequestration incentives from direct or indirect buyers of your products may be offered. Or carbon neutrality may become a requirement.

The bottom line is that you cannot sell the same thing twice, and if you have sold carbon credits to a third party outside of your supply chain, they will not be available for use within the chain.

Implications of long-term contracts

Many natural capital deals are long-term.

Circumstances can change and you will probably agree to do or not do certain things on your farm from one generation to the next. You will want to consider this before signing up.

Check what restrictions/consents/notifications are required before transfers of land ownership or occupancy can take place.

Make sure your business structure is such that the next generation doesn’t just end up with responsibilities, but can enjoy rewards under the agreement.

If what the agreement provides for is a change of use from agriculture, you will want to seek advice on the associated tax consequences, or at least the risk of your land not being considered for agricultural use.

On the inheritance tax front, for example, the exemption of agricultural property can be jeopardized by a program to create habitats or wetlands.

Things to watch

  • Restrictions in any rental agreement (or need for landlord or tenant agreement)
  • What additional obligations do you accept (monitoring and reporting, consent before any change of ownership/land occupation)?
  • What rights you grant (results rights, access rights, information use rights)
  • Interaction with other programs or contracts to which you have subscribed (are you already paid for the same actions or results?)
  • Fiscal implications of any long-term land use change

Edd Johnson is a partner at Roythornes Solicitors.

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