Recent Market Updates

The natural carbon market has been developing for a number of years now. However, that development has really started to pick up pace over the past 18 months, and this year alone we’ve seen key shifts which demonstrate that the market is beginning to mature.

The first was the acknowledgement by BlackRock in February that natural capital is now an investable asset class. This signals a key change in the way that investment markets recognise natural capital and its investment opportunities for funds going forward. It seems likely that BlackRock and other investors will begin repricing assets to take account of natural capital values, which will impact the valuation of almost every sector in some way. 

Another key shift this year has been the recent publication by Scottish Forestry and International Union for Conservation of Nature (IUCN) UK of template agreements for the purchase of Pending Issuance Units (PIUs) and Carbon Units (CUs) by end users. While the use of these agreements for the purchase of PIUs and/or CUs is not compulsory, and Scottish Forestry acknowledges that they’re templates only and not final form agreements which are suitable for every sale contract, it demonstrates the beginning of standardisation across the legal industry for the sale and purchase of PIUs and CUs. This is an important step in reassuring investors and purchasers.

These signs that the market is beginning to mature are both positive and welcome, however, much of the focus has been on the final sale of PIUs and CUs to end users, and in our experience the devil really lies in the detail – from an investor’s perspective much depends on how the carbon projects have been structured at the outset.

Project Development Considerations

If you’re a landowner looking to become involved in natural capital through the creation and sale of carbon credits, or if you’re a project developer looking to develop or take on the management of a carbon credit project, the first important step is ensure that you have registered the correct account type with the S&P Registry (the body currently appointed to register and manage carbon credits in the UK). There are five account types to pick from:

1. Project Developer – for parties who own and manage their own projects (including the onward sale to end users).
   
   
2. Project Proponent – for parties who own projects, but do not manage them.
   
   
3. Retail Aggregator – for parties who wish to act as an agent for end users, effectively contracting to acquire (or aggregate) PIUs and/or CUs for onward transfer to an end user.
   
   
4. Trader – for parties who wish to buy, sell and trade PIUs and/or CUs – obtaining a trader account may have its own challenges, not least because this account type is only available to financially regulated bodies.
   
   
5. End User – for parties who are only interested in buying carbon credits for their own offsetting purposes.

Secondly, it’s important to make sure that you understand the underlying structure of your proposed project, and that you set it up correctly to avoid unexpected restrictions on your ability to sell or transfer it (or any associated PIUs and/or CUs). In some cases, the structure cannot be unwound once created, so this is particularly significant for parties looking to either invite or make investment into a new carbon credit project in future – failure to structure correctly at this stage could prove catastrophic for investment opportunities.

In circumstances where a developer is being appointed by a landowner to create and manage a carbon credit project on their behalf, parties should consider carefully whether the developer will be granted (1) 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, unless they have a trader account type. 
   
   
2. Comms Agreement – this sets out the rights and responsibilities of the landowner and the developer, including how the developer will manage the PIUs and/or the CUs on behalf of the landowner. However, 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.

Summary

It’s in all parties’ interests 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 PIUs and/or CUs to end users. Taking advice at early stages is critical to future proofing plans you might have for your project, and the onward sale of any associated PIUs and/or CUs.

It’s important to note that the Woodland Carbon Code and Peatland Carbon Code policies are continuing to evolve with this maturing market space, and so you should ensure that you’re up to date with and understand the current policies that will regulate your project.

If you’re at the early stages of considering or developing your own woodland or peatland carbon credit scheme and would like further advice, please get in touch with Alan Gibson, or your usual contact in our rural business team. Our team are increasingly active in this market space and have experience working with Woodland Carbon Code and Peatland Carbon Code to guide policy changes to meet evolving market demands.

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