A guide to carbon credits: complexity, value and common questions answered

As interest in natural capital and sustainable land use continues to grow, carbon credits have emerged as a key mechanism for delivering environmental benefits while unlocking new revenue streams for landowners.

In the UK, woodland creation and peatland restoration projects are at the forefront of this market, supported by established frameworks such as the Woodland Carbon Code and the Peatland Code.

Yet, despite the increasing prominence of carbon credits, many landowners, investors and developers still grapple with the practical and legal complexities that sit behind them.

In this article we answer some of the most frequently asked questions about carbon credits, with a particular focus on how they operate in practice.

1. What is a carbon credit?

A carbon credit or “carbon unit” is a verified credit representing one tonne of carbon dioxide equivalent sequestered from the atmosphere by a recognised UK woodland creation project or peatland restoration project.

There are two carbon credit schemes operating in the UK:

1. the Woodland Carbon Code (administered by Scottish Forestry), which administers the validation and verification of woodland carbon units; and
2. the Peatland Code (administered by International Union for Conservation of Nature (IUCN) UK), which administers the validation and verification of peatland carbon units.

For more information about carbon credits, please see our previous article: Natural capital projects in Scotland: carbon credits.

2. What is the “additionality test”?

The additionality test applies to all carbon credit projects, and is set out in both the Woodland Carbon Code and the Peatland Code, but it broadly comprises two parts – the legal test and the financial test.

1. Legal test – the woodland must not be required by law, including any regulation, court order, planning decision or other legally binding agreement (e.g. a compensatory planting agreement) which requires it to be planted.
2. Financial test – the project developer must show that, without carbon finance (i.e. the sale of carbon units), woodland creation is not the most economically or financially attractive land use.

More detail about the additionality test can be found in the Woodland Carbon Code and the Peatland Code.

3. Can I claim carbon credits on my existing woodland or habitat management area?

This will depend on the circumstances, but an existing scheme is very unlikely to meet the additionality requirements of a carbon credit project or, as with compensatory planting, any other natural capital project.

This doesn’t mean that an existing woodland or habitat management scheme cannot qualify as a natural capital project, particularly if the actual extent of planting or habitat management exceeded any planning or regulatory requirement. However, there may be some difficulty in demonstrating an ecosystem benefit, unless you conducted a baseline survey before the scheme commenced.

This will be very individual to the circumstances, so if in doubt you should seek appropriate professional advice.

4. Can I claim carbon credits on my new woodland planting project?

Potentially. If the proposed planting meets the additionality test, then it may be possible to claim carbon credits. However, you should ensure to: (a) register an appropriate account with the UK Land Carbon Registry; and (b) register the project with the Woodland Carbon Code before commencing planting.

The woodland planting scheme will then have to be approved by the Woodland Carbon Code and carried out in accordance with the agreed project specifications.

5. Can I claim Forestry Grant Scheme payments on woodlands which are planted for natural capital purposes?

Yes – you can use Forestry Grant Scheme (FGS) payments to establish a woodland which generates carbon credits, but there are important conditions to be considered around additionality and avoiding double funding.

Although it’s possible to stack grant funding and carbon income, if the FGS fully pays for the woodland, then the carbon credit project may fail the additionality test (see 2 above).

This will be very individual to the circumstances, so if in doubt you should seek appropriate professional advice.

6. Can I sell my carbon credits to someone else?

Yes – carbon credits are designed to be a tradeable asset class. However, once they have been sold to an “end user” for the purposes of offsetting their own emissions, they cannot be traded again.

Since carbon credits are designed to be tradable assets, they can of course be traded among parties. However, for anyone looking to acquire carbon credits for any purpose other than for their own offsetting purposes (i.e. as an “end user”), the ability to buy, sell and generally trade carbon credits can become complicated depending on how the project has been registered and structured at the outset, as well as the purpose of the sale.

In all instances, it’s important for all parties to ensure that initial structuring considerations are given due care and attention so that everyone gets the result they’re looking for, whether that’s an onward project sale, the possibility of future investment, or simply the creation and sale of carbon credits to end users.

For more information, please see our previous article: Natural Capital – the carbon credit market awakens in Scotland, but the devil is in the detail.

7. If I work with a developer to developer a carbon code project on my land, who owns the carbon credits?

In circumstances where a project developer is being appointed to create and manage a carbon credit project on behalf of the landowner, the parties will need to enter into either: (1) a Proof of Rights, or (2) a Communications Agreement (“Comms Agreement”):

1. Proof of Rights – this effectively splits the carbon ownership from the land ownership in a way which results in legal separation of those rights. It’s worth noting that a proof of rights agreement can cause difficultly for the carbon owner transferring that carbon ownership onto any party other than an end user.
2. Comms Agreement – this sets out the rights and responsibilities of the landowner and the developer, including how the developer will manage the carbon credits on behalf of the landowner. This does not have the effect of separating the land ownership from the carbon ownership, and so the landowner remains the owner of the carbon even if the project developer has taken on the full responsibility for and costs associated with the creation and management of the project.

The parties should carefully consider the most appropriate approach to be taken, depending on where the balance of risks, rewards and responsibilities lies.

8. What happens if I develop a carbon code project on my land but a developer approaches me to build an energy project in the same place? Can I agree to unwind the carbon code project and develop the energy project instead?

It depends – this is a very complex and bespoke scenario, and it depends on the precise circumstances of the project structure, the stage of the project, and the current carbon credit ownership position. Invariably, if the landowner has started selling the carbon credits off to end users, then this will add a great deal of further complication and careful consideration would be required to calculate the true extent of the carbon credit project which remains within the landowner’s control.

This will be very individual to the circumstances and will require a bespoke approach, so if in doubt you should seek appropriate professional advice.

9. Can carbon code projects and energy developments co-exist on the same property?

Yes – it is possible to co-locate carbon code projects and energy developments on the same property, but it requires co-operation among all interested parties, including the landowner, the carbon credit project developer (if any) and the energy developer. However, it will be important to ensure that both sets of project documentation are drafted in a way which permits and facilitates the level of reciprocal co-operation required among parties.

In order to achieve this, the parties may have to accept additional levels of risk sharing, and so a commercial approach and understanding of the risks involved will be critical for all involved.

Carbon credit projects can offer valuable opportunities for landowners and investors, but they require careful planning, clear structuring and a thorough understanding of the rules that govern them. Each project is shaped by its own legal, financial and practical considerations – from meeting additionality requirements to managing long-term obligations and potential land use impacts.

As the carbon market continues to evolve, taking early, informed advice and considering your objectives at the outset will be key to ensuring that any project delivers both environmental benefits and commercial value. Please get in touch with a member of rural land & natural capital team to discuss how we can help.

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