Central Association of Agricultural Valuers                            CAP0021

 

Written evidence submitted by the Central Association of Agricultural Valuers

 

 

SUBMISSION TO THE HOUSE OF COMMONS ENVIRONMENTAL AUDIT COMMITTEE

 

THE ROLE OF NATURAL CAPITAL IN THE GREEN ECONOMY:

SUPPLY SIDE CHARACTERISTICS

 

 

1 Central Association of Agricultural Valuers (CAAV)

The CAAV is the UK-wide specialist professional body representing, briefing and qualifying some 3,000 professionals who advise and act on the very varied matters affecting rural and agricultural businesses and property throughout the United Kingdom.

Instructed by a wide range of clients, including farmers, landowners, lenders, public authorities, conservation bodies, utility and infrastructure providers and other agricultural and rural businesses as well as others including government bodies, this work requires a deep understanding of practical issues.

The CAAV does not exist to lobby on behalf of any particular interest, knowing that members will be called on to act for or advise any party under developing policies. With that background, the CAAV’s public policy work seeks to ensure that policies are designed to be implemented in as practical a way as possible, taking account of circumstances and so be effective, practical, with the least unfortunate, unintended or perverse side effects and enables sensible advice to be given on which clients can take decisions.

While aware that it is not the primary interest of this call for evidence, the CAAV wishes to identify some features of the supply of land-based natural capital assets to developing natural capital markets. These features, if not addressed within the structure of natural capital markets, may act as barriers to expansion. 

The issues explored here are by no means exhaustive.  Nor do we intend to draw attention from the primary questions of the call for evidence.  Instead, the purpose of this note is to provide a brief overview of the context of the delivery of natural capital schemes in the UK.  We recognise that natural capital markets may be about more than the management of rural land.

Our comments are limited to the United Kingdom, but the general points are relevant to any jurisdiction.  The control of land, and the management of nature, is of central concern to the successful scaling-up of the wider natural capital market.

For this submission, we leave it to others to comment on the higher-level issues of developing natural capital markets.

2 Supply Side: Some Features

The features of the supply side of natural capital markets in England are explored in more detail in a briefing document prepared by Jeremy Moody, Secretary and Adviser to the CAAV, for the Lancashire Wildlife Trusts: A Review of Some Impediments to Farmers Entering Environmental Land Management Agreements.  This briefing document is available to read on our website, by following the link above.

It reviews the technical and practical issues for delivering environmental schemes in England, as well as the wider context of changing land management practices and, in particular, touches on attitudes, land tenure and taxation issues.

Although related more directly to England’s developing agri-environmental schemes and policies, that review is more widely relevant to discussion of land use change and natural capital agreements.  Moreover, under the new structure of English farming policy, there is much similarity between public schemes – looking to provide public money for public goods – and the developing private markets for natural capital.  

While tailored to the United Kingdom, the issues identified in this submission can be generalised and then applied to other jurisdictions.  However and despite the comments below, we see the attraction of the United Kingdom with its liberal market for contracts upheld by a common law system and expectations of compliance.

2.1 Availability of Scale

By comparison with some other countries, rural land in the UK is split into small areas of management. The average farm size in England is 85 hectares with some regional variation.  Scotland has some significantly larger holdings seeing more activity, while also being home to numerous very small plots. Both Northern Ireland and Wales have a lower average area than England. 

Small scale holdings means that individual land managers are frequently only able to bring ‘penny lots’ to a natural capital market.  For the potential scale of some buyers, the farmland market can look like a cottage industry.

Such small scale of what can be offered creates at least two problems:

-          in many markets, a significant mismatch between a buyer wanting scale and a market of small suppliers, making aggregation of suppliers an issue

-          the ability of any transaction to carry its costs both in the transaction itself and subsequent requirements for monitoring, recording and verifying compliance and outcomes over the period of the agreement.

The first issue may be answered by collaboration to achieve landscape scale change or the delivery of large natural capital projects, but this increases the transaction costs for any agreement and increases the risks within natural capital markets with potential tensions between suppliers.  

The second issue of relatively small areas of land management also mean that the UK is structurally uncompetitive in those natural capital markets that can develop globally as, for example, with carbon.

Larger scale land use change will often alter a significant proportion of a given holding, potentially making a fundamental change to the nature of that business.

2.2 Tenure

Those managing natural assets need to have access to land and the required security of occupation to deliver on their obligations within natural capital markets. Natural capital enhancement often requires long term commitment (Biodiversity Net Gain in England, as one example, requires a minimum 30-year commitment) and the ability to make significant changes to land use and land cover. 

Do land managers have sufficient control to deliver a long-term natural capital enhancement? This raises challenges for those occupying land on a lease or with access under licence.  However, farming tenants principally take land for farming and economic motives, needing to earn an income and pay the rent, which tends to limit their interest in more substantial land use change, which itself might affect the landlord’s reversion.   Where other opportunities are seen, the Scottish Government’s proposed Land Use Tenancy appears a positive framework for new agreements for environmental and economic activity.

2.3 Policy Alignment, Prioritisation and Replicability

The development of the natural capital supply can be hindered by misalignment with other areas of public policy.

Governments must balance a range of outcomes from land use, the priority of each affected by external factors.  For example, the escalation of the war in Ukraine in 2022, jointly with inflationary pressures arising out of the disruption of COVID-19, has renewed attention on issues of national food security and supply chain resilience.  Other areas of concern include increasing the capacity of renewable energy, the attendant infrastructure, and increasing pressure for residential development. Competing pressures and legislative histories results in a range of policy incentives for land use.

Alignment is also of concern at a regional level.  Natural capital markets are developing, in some circumstances, as regional markets, influenced by local natural, regulatory and organisational structures.  At a larger scale, under the devolved structure of UK regulation, investment markets are likely to differ between England, Scotland, Wales and Northern Ireland.

The developing nutrient mitigation market provides an example of regional difference:

Local authorities face the challenge of balancing multiple roles and of prioritisation: as landowners of potentially significant and relevant assets; as planning authority (at the point of decision making and then onward monitoring); as a responsible body for conservation covenants in England and for planning obligations more widely; in the distribution of certain relevant sources of funding. The action of national agencies – also often owning and managing land – may conflict with the actions of local bodies. 

Replication and alignment are therefore a key issue for scaling natural capital markets at a national level.  In Scotland, the publication of a Land Use Strategy and Investment Principles for Responsible Investment in Natural Capital may serve to set priorities for the allocation of investment.  In England, Local Nature Recovery Strategies are intended to provide some strategic spatial oversight and alignment for the development of natural capital markets; the proposed Land Use Framework may also support standardisation.  Area Statements in Wales provide an overarching framework.

2.4 Taxation

In the UK, taxation can provide a particular example of where polices can be aided by alignment.  Concern about the loss of existing tax reliefs and benefits can be a barrier to the development of the supply of natural capital assets.

Earlier this year, HM Treasury and HMRC consulted on the taxation of environmental trades and an associated change to Inheritance Tax (Taxation of environmental land management and ecosystem service markets - GOV.UK (www.gov.uk)).  We have explored, supportively, the issues in this at length in our response to that consultation (which is available here: CAAV Response to HMRC Consultation - Taxation of environmental land management and ecosystem service markets - The Central Association for Agricultural Valuers).

Agriculture accounts for around 70 per cent of land use in the UK. Agricultural land and business has the benefit of various reliefs from capital and revenue taxation, the most high-profile of which is perhaps Agricultural Property Relief from Inheritance Tax.   In broad terms, the present position where agricultural (or business) use is required to relieve a 40 per cent tax on land values creates a disincentive to move land into purely environmental uses. Prompting fear of moving far in that direction, that acts to restrict the development of natural capital markets on such land.  The fiscal neutrality broadly proposed by the Treasury’s consultation could answer that; we have raised important operational points in our response. 

2.5 Familiarity, Identity and Political Resistance

In the UK, agricultural production has been supported, explicitly and implicitly, by Government policy since the Second World War, including almost five decades in the EU’s CAP, creating established interests and patterns.  The UK also has a deep cultural connection to agricultural land use, and rural communities are sometimes a reserve of regional or national identity.

Long-established regimes of environmental support have habituated the agricultural sector to certain agreement structures.  There is greatest familiarity with 5–10-year agri-environmental schemes, such as Mid Tier and Higher Tier Countryside Stewardship. Familiar schemes seek land use changes that can often be integrated into existing farming systems, or which can be accommodated on areas of land alongside a continuing agricultural enterprise. 5-to-10-year agreement lengths are more easily assimilated into farm business planning cycles; longer agreements, for greater land use change, require a significant change in management philosophy.

Extensive and sudden land use change, such as can be required for the delivery of natural capital schemes, can therefore lead to social and political resistance.  Recent examples include high-profile reporting of opposition to tree planting schemes in Wales (BBC Radio 4 - Where Once Were Farms) and discussions of changing land management in Scotland (Natural Capital - Ownership - Our work - Scottish Land Commission).  Similarities can be seen in opposition to the development of renewable energy projects at the scale that net zero requires, and water management schemes such as the construction of new reservoirs.

As those illustrate, the changes that may be thought required for enhanced natural capital and to meet net zero can be ones that disturb those most concerned about conservation and environmental matters as well as those anxious that food be produced domestically.

2.6 The Nature of Natural Capital Markets and the Mitigation Hierarchy

There seems a need to have some clarity about how far natural capital markets are synonymous with offsetting and where they are synonymous, what that might mean.  Offsetting environmental damage is the last resort of the mitigation hierarchy, after not causing damage, reducing the damage caused and mitigating it on site.  The question becomes how far natural capital markets can provide answers further up the mitigation hierarchy.

As the effects of climate change begin to have greater impact on land use – for example, more frequent flooding, or longer periods of drought – then it may be that investment is increasingly targeted to measures of adaptation.  Investment in natural capital may have relevance to adaptation, including in nature-based solutions such as natural flood management and soil-moisture retention, or the use of vegetation for temperature control.  However, any such refocussing of investment may have an impact on mitigation investment and developing offsetting markets.

Therefore, the lack of a strategic approach to the balancing of investment in mitigation or adaptation can lead to long-term supply side uncertainty in natural capital markets.

2.7 Different Natural Capital Markets

It seems likely that different types of natural capital (itself a very loose phrase) may have different characteristics in the marketplace.  Perhaps the most obvious example lies in carbon, with the time frame provided by the net zero target of 2050.  Carbon sequestration might often be consistent with increasing other forms of natural capital (as by improving non-organic soils) but, as illustrated by the recent DLUHC decision on the Marks and Spencer store in Oxford Street, may be of limited value for after 2050 if mitigation policies work.   More widely, Biodiversity Net Gain seeks a 30-year commitment, but that can be 125 years for Nutrient Neutrality.

The complexity arising from the differing characteristics of assets within natural capital markets can be a barrier to entry for some.

3 Conclusion

As mentioned above, it is not the intention of this submission to provide a comprehensive review of the context of the supply of natural capital assets or ecosystem services.  Instead, we wish to signpost for members of the committee some of the practical questions for the implementation of land-based natural capital projects, whether supported by private or public funding. 

The CAAV is available to supply more technical detail and wider briefing on request.

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September 2023