Woodland Carbon Update – May 2021

We see signs of infancy across all carbon markets, including the one for woodland carbon. The absence of pricing transparency, which we are keen to rectify, is the most obvious symptom. Meantime, we continue to work hard to address others which we feel are important steps to ensure the healthy development of the market so that it meets both landowners’ and companies’ needs and wishes.

Recent pricing trends in the UK’s woodland carbon market

Turning to recent prices for PIUs across the UK market for woodland carbon, recent reports suggest wide variations continue with prices ranging from £9 up to £25. We have recently heard one large mixed conifer and broadleaf scheme on the west coast offered £9 per PIU though the origin of that offer implies the selling price to any corporate could be markedly higher.

We are also aware of well-located broadleaf projects in southern England which would accept offers around £20 for their PIUs. This suggests the ‘real’ price could lie between £16-£17. Other conversations have indicated a price for PIUs around £12 in Scotland and slightly higher as the proximity to the south-east increases which broadly reflects the two quotes cited above.

Price transparency is vital to the market’s healthy evolution. As we have noted elsewhere, there are two principal parties in the woodland carbon market: the landowner selling the PIUs and the company buying them. It is vital that the former is compensated properly for planting young, carbon-oriented woodlands while the latter also pays an equitable price for their woodland-based carbon credits.

Until now, the modus operandi in the woodland carbon market has distorted this important function. Carbon traders, by buying from one and selling to the other, have distorted the true price of PIUs. CarbonStore is keen to address this. If any readers, be they buyers or sellers of PIUs, have useful and informative details regarding pricing across the woodland carbon market, please email me at david.mcculloch@carbonstoreuk.com

Robust Legal Contracts: An Essential Tool for any Sale Agreement

An important element of this new approach is the need for robust and comprehensive legal contracts between landowners and corporates.

Natural capital assets, such as woodlands, are inherently susceptible to natural events and these are no one’s fault. Unfortunately, they are also susceptible to irresponsible practice.

Companies must have faith in the sequestration claims implicit in PIUs and WCUs. Indeed, this is essential to maintain their value. Robust and comprehensive legal agreements between landowners (as the sellers of PIUs) and companies (as their buyers) are therefore needed which articulate the risks, responsibilities, and indemnities for each party.

CarbonStore has invested significant time and resources developing the necessary legal contracts which protect the interests and outline the responsibilities of the two parties in any woodland carbon transaction. As one leading lawyer recently told us: “You could drive a coach and horses through many of the existing contracts in the market and CarbonStore’s is a much needed development in the market.”

Explaining the Principles and Protocols of the Woodland Carbon Code

Part of the challenge in developing legal agreements is the complexity of the Woodland Carbon Code. Understanding the difference between a PIU and a WCU is only the start.

There is the UK Land Carbon Registry to navigate, the role of Project Developer to understand and the registration, validation and verification processes to get to grips with. Any landowner wishing to sell PIUs and WCUs needs a basic grasp of these processes.

We, in CarbonStore, will therefore be shortly publishing our ‘Users Guide to the Woodland Carbon Code.’ The numerous rules and regulations associated with the Woodland Carbon Code are all premised on sound logic. By explaining these, alongside the various practical steps necessary to generate PIUs and WCUs, we hope to achieve two goals:

For companies: By explaining the Code’s underlying principles and the rigorous checks and inspections required by it, we hope it will foster greater credibility in its PIUs and WCUs which, in turn, will increase their interest in UK based, carbon-related, woodland projects.

For landowners: A basic understanding of the Code’s whys and wherefores will help them appreciate the undertakings involved when they sign, for example, the Landowner Commitment Statement (required by the Woodland Carbon Code) or the Communications Agreement (required by the UK Land Carbon Registry).

Of course, CarbonStore can help with the practical steps. We can register your project in the Land Carbon Registry, complete the Project Design Document (required for validation), fulfil the Project Developer role for you and take the paperwork and bureaucracy off your hands. However, a basic awareness of the Code’s principles and practices is essential to understanding what that all means.

Government Outlines Newer, Higher Woodland Creation Targets

Beyond the confines of the woodland carbon market, its related markets have also witnessed some interesting developments over the past month. On 8th May, The Times carried an article discussing the government’s longer-term targets for woodland creation.

Uncited sources were reiterating the manifesto commitment to plant 30,000 hectares per year by 2025. However, these same sources also introduced a new, much higher longer-term goal to plant 50,000 hectares per year from 2035. Against 2019/20 new planting rates, this represents a rise of 2.3x and 3.8x respectively.

Guarding Against Nascent Capacity Constraints

As chart 1 below illustrates, this would represent a sea change across the forestry industry so it is crucial that these quantitative targets don’t jeopardise quality. We will need more forestry graduates acquiring the necessary skills and expertise, we will need more properly trained and qualified contractors to undertake the planting work and we will need more forestry managers to design and supervise the planting.

Any objective assessment of both the industry and the company will show that Tilhill is uniquely wellplaced to help protect landowners against these risks. It is the only UK-wide woodland and forestry company. Its forestry managers have a bank of forestry knowledge unmatched by any other UK company. And it recruited a record number of graduate foresters in 2020.

However, aside from these latent capacity issues, landowners should also keep in mind that the government will likely be reluctant to maintain the levels of grant funding for woodland creation that are currently available. The costs would be unreasonable. They therefore need to nurture an incentive scheme through the private sector, hence the development of the Woodland Carbon Code.

Actual and Forecast New Planting in the UK, 1976-2050e (‘000 hectares)

EU Carbon Prices at Record High

The recent rise in EU carbon allowance prices (to €50) has therefore garnered much attention from farmers and landowners. After all, increased woodland creation will require larger incentives as governmental targets force us all to look in new places for plantable land.

Attention on these markets is likely to intensify as 19th May approaches and the UK holds its first auction under our new domestic Emissions Trading Scheme. Initial prices in the UK are likely to reflect closely their European counterparts but, thereafter, government policy will be the main influence in these compulsory carbon markets.

Backlash to the EU’s Carbon Border Tax

The recent backlash to the EU’s proposal for carbon border tax is therefore significant. The EU’s aim is to put a price on imports from countries where it is cheaper to pollute, in order to protect European manufacturers facing higher carbon costs. Unfortunately, it has been described as ‘extremely complicated’ by the US climate envoy’s team and ‘discriminatory’ by
certain emerging economies, including Brazil, India, and China.

At every level, carbon markets are finding their feet. National governments disagree over environmental policy. Carbon markets lack transparency and liquidity. Private sector participants are grappling with the basic principles. Fortunately, the UK government is taking a decisive lead in global environmental policy so, with COP26 in Glasgow approaching and the eyes of the world’s conservation movement shifting in our direction, the pressure to reduce our carbon footprint is likely to grow.