Professor Fergus Lyon (Middlesex University) CAP0038
Written evidence submitted by Professor Fergus Lyon
Submission to EAC Call for Evidence on ‘The role of natural capital in the green economy’
Professor Fergus Lyon, (Centre for Enterprise, Environment and Development Research, Middlesex University)
working in partnership with Food Farming and Countryside Commission, the ESRC Centre for the Understanding of Sustainable Prosperity and the Natural Environment Research Council. He has led the report on “Natural Capital Markets: What farmers and policymakers need to know” for the Food Farming and Countryside Commission.
Research has been conducted on natural capital markets by Middlesex University for the Food Farming and Countryside Commission, the ESRC Centre for the Understanding of Sustainable Prosperity and the Natural Environment Research Council. The research has focused on how current markets and policies are affecting small farms as well as larger land-owners.
Through a rigorous study of the markets, we have found that there is much interest from private capital investment providers, but there is a lack of investable propositions. The potential contribution is therefore dependent on the ability to prepare a business case. We have found this comes in two areas: firstly where larger businesses want to voluntarily minimise their biodiversity and carbon impacts, and secondly where public policy has created a market around Biodiversity Net Gain, Nutrient Neutrality, or improving water quality. Sensible regulation of environmental impacts can therefore create the incentives for businesses to work with farmers to solve these issues and create new opportunities for small farms.
In England, Environmental Land Management Schemes play a key role in delivering environmental actions. There is some overlap with the private sector-related natural capital payments although care is taken by both ELMS and the private buyers to avoid double payments. ELMS needs to be playing a role in complementing private payments for ecosystem services. There is a risk that ELMS may be crowding out the private investment, as farmers prefer to go for shorter contacts under ELMS. A policy agenda, therefore, needs to explore how ELMS can crowd in rather than crowd out investment.
Where small farmers are not able to develop initiatives on their own, there can be benefits from having policy that encourages clusters, farmer led solutions, cooperatives and landscape led partnerships. There are also opportunities to have community-led funding where devolved budgets and local democratic decision making can support initiatives with wider social and environmental impacts.
Previous policies have been used to create clear definitions of what is termed ‘agricultural’. With natural capital markets creating new opportunities, there is a need to reassess what is termed agricultural. At the moment there is a disincentive for tenant farmers to enter into natural capital initiatives if the land in question is then deemed to be non-agricultural, and they could be given notice to quit. Similarly, there are measures to ensure family farms continue between generations rather than having to be sold to pay inheritance tax. Agricultural Tax Relief (and Business Property Relief) need to consider the trading activity in natural capital markets to ensure there are no disincentives for long term contracts. The tax regime needs to align with the objective to encourage farmers and landowners to participate in natural capital markets. This can be achieved by amending the legislation to ensure that inheritance tax reliefs are not lost on the land taken out of agricultural use for these purposes.
The uncertainty in natural capital markets, and in agriculture as a whole, is leading land managers towards a “wait and see” strategy. As the different natural capital markets of carbon offsetting and biodiversity net gain develop, there is a need for a policy agenda concerning how to ensure integrity in measurements and avoiding double payments. While the private sector takes time to develop different competing approaches, there is a public good of having common sets of metrics, a common understanding of approaches, and a national registry or ledger that will ensure a specific natural capital on a parcel of land is not double counted. This this particularly important where there is stacking of natural payments. This is also particularly important where landlords and tenants may both be registering different elements of natural capital on the same parcel of land. No single private organisation should take on this role, and there is a strong justification for the public sector to play a coordinating role in setting up such a system.
Certainty in markets comes when there are common standards and systems in place that can hold businesses to account. The UK Woodland Carbon Code and UK Peatland Code are examples of having common standards and Defra’s work on biodiversity net gain also shows how public sector can play a role in creating the markets. Soil Carbon codes are less developed and the vital role this can play in tackling climate change justifies a strong role for government in accelerating the Soil Carbon Code. There also needs to be systems in place for holding businesses to account and challenging claims of greenwash. The Advertising Standards Authority has been playing a vital role in this, and this should be strengthened and supported along side other forms of trade standards to ensure the integrity of the new markets continues. Professional advice is vital but this too needs standards to ensure rigour and professional indemnity insurance is covered.
Clear evidence of additionality is needed for private natural capital markets, where payments are shown to result in biodiversity benefits that would not have happened otherwise. However, additionality also means that private payments cannot support existing good practice. The public good of maintaining high quality existing natural capital needs to be supported though ELMS. Farmers reported that they are penalised when having past stewardship actions that reverted arable land to less intensive wildlife friendly grass land. While the initial payments were attractive enough to incentivize a shift away from arable production, these subsequently were reduced to a fraction of the original payments once the stewardship contract was being renewed. This lack of support of existing good practice is creating a perverse incentive for farmers to delay action, or even reduce their current level of natural capital so that they can then demonstrate greater additionality. A policy agenda to support maintenance of natural capital would address this. This could include exploring support payments and tax incentives where higher standards are being met.
As natural capital markets emerge, there is a need for clarity of what should be measured and how to measure this. There is also a need to have a baseline from which to show additional natural capital accumulation. This can be covered by some payment systems, but with the delays in developing the markets, there is a need for having a baseline funded by government so that farmers can then benefit from future positive changes such as increased carbon capture in soils. Public sector agri-environmental programmes can play a role in encouraging this. However, there is uncertainty over what should be measured in soil testing with a risk that the low levels of funding per hectare will result in lower cost soil carbon measuring which would not be usable as a baseline by those wanting to buy carbon in the future. However, there are considerable benefits for farmers to know how their practices support carbon capture and biodiversity, so any measurements can be positive on this front. There also needs to be incentives for reporting on natural capital.
There is also a need for a cadre of ecological surveyors to meet future needs in businesses, as well as volunteers supporting farmers. As technology develops ways of measuring biodiversity and other key measures, there can be a democratisation of ecological surveys with digital identification of flora and fauna. Having more volunteers available for smaller farmers will enable them to access knowledge on natural capital.
September 2023