Sustainable tree planting and carbon sequestration

The UK government’s net-zero commitment legislates the need to consider the effect of business and industry on the environment. The subsequent rush for carbon sequestration capability has spurred interest in forestry, particularly at greenfield level, as investors position themselves to benefit from income streams.

By adding green income streams to an otherwise long-term standing capital reserve, investors previously prohibited by the irregularity of income from forestry assets now view forestry as a viable option. The UK government has supported this by introducing the Woodland Carbon Guarantee in England, a scheme aimed at establishing a public marketplace for carbon offsets through woodland creation. While we expect private markets to leverage from this, much work is still required at policy level to fix the operation of carbon credits, preferably to a global standard.

Of course, the forestry sector has a large role to play in the UK’s net-zero pledge, but perspective should not be lost on the practical and economic implications of tree planting as an offsetting mechanism. Limited available land area and competing existing land uses in the UK make substantial tree planting quotas challenging to deliver. Undoubtedly, Covid-19 has put UK food security firmly back on the table and environmental concerns have changed as people endure lockdown. It remains to be seen whether the pandemic alters the policy approach to land use, which focuses largely on environmental delivery. So as much as offsetting will be an important response to the net-zero agenda and could form a valuable part of corporate Environmental Social and Governance (ESG) reporting, tree planting is not a quick win. Businesses need to understand the hierarchy of emissions reduction that includes cessation and mitigation strategies – they cannot plan to simply ‘buy out’ environmental problems.

It is worth noting that while forestry assets have received increasing interest as boardrooms are pushed to address ESG factors, it is foreseeable some of this sentiment is relaxed or paused as the financial sector works to recover the extraordinary losses across many other asset classes incurred since February 2020. Capital reserves may be constrained into alternative assets, like land for tree planting, over the short term, but there remains an opportunity for the long-term investor looking for uncorrelated, values-based returns.

THE WOODLAND CARBON GUARANTEE

This is a £50 million scheme to help accelerate woodland planting rates across England. The scheme is held as an online auction, the first of which took place in February 2020 and saw 18 contracts offered by the Forestry Commission to help stimulate the creation of 182 hectares of new woodland. The next auction takes place from 8–19 June 2020 with £10 million available. Auctions will be held every six months for up to five years, depending on the rate of uptake.

The Guarantee provides successful applicants with the option to sell the captured carbon from woodlands in the form of verified Woodland Carbon Units to the government for a guaranteed price every five or 10 years up to 2055/56. The option to sell credits on the open market rather than to the government will also be available. The woodland in the guarantee must be validated under the Woodland Carbon Code (see below).

THE WOODLAND CARBON CODE

A voluntary standard for carbon sequestration within UK woodland projects, used by private investors, brokers and the government.

• The code creates verifiable carbon rights that can be sold and provides assurance that the planted trees will be well managed and will capture the carbon dioxide claimed. Each tonne of carbon dioxide sequestered is called a Woodland Carbon Unit, which can be used by companies to report against UK based emissions.

• The code has a rigorous verification and monitoring process and strict eligibility criteria. It only applies to new woodland creation schemes registered two years before to two years after planting commences. Applying to the code does not exclude projects from applying to other Forestry Commission funding schemes.

• The code calculates the projected carbon sequestration rate of projects, taking into account woodland type, management and quality.

• Projects must conform to the UK Forestry Standard and woodland carbon projects that are registered with the standard are listed on the UK Woodland Carbon Registry, to avoid double counting. Regular third party auditing is carried out every five to 10 years.

• The code doesn’t yet account for the final use of timber, which is problematic, as it fails to include possible carbon emissions through, for example, burning wood.

• Woodland carbon credits cannot be used in compliance schemes such as the EU Emissions Trading Scheme and cannot be used outside of the UK. They are intended for the voluntary offsetting market.

Carbon – a new player in the forestry marketplace?

EMISSIONS REDUCTION AND OFFSETTING HAVE BEEN BROUGHT CENTRE STAGE IN RECENT YEARS

The UK’s commitment to achieving net-zero emissions by 2050 has significant impacts for the nation’s future land use, in particular increasing demand for tree planting. The legally binding target, combined with the power of climate-related financial disclosure and the 'Thunberg effect', has brought carbon emissions and offsetting centre stage. The value of woodland carbon sequestration could emerge as a new potential income stream for land managers.

Carbon offsetting

Putting a value on woodland carbon depends on quantifying carbon sequestration. However, calculating an average amount of carbon dioxide absorbed is no easy task, as the type of tree, its age, its location, soil type, stocking density and management all alter the quantity of carbon sequestered. Therefore rigorous assurance standards are required to verify that a forestry project is absorbing the stated amount of carbon. Within the UK, the government-recognised standard is the Woodland Carbon Code.

The government is promoting both public and private carbon offsetting markets in order to incentivise tree planting and reach its net-zero targets. Currently, 13% of the UK is wooded, much lower than the European average of 37%. Annually, around 10,000 hectares of land are planted with trees, mostly in Scotland. If we are to meet net zero by 2050, it is estimated that 30,000 hectares need to be planted each year, nearly triple the current annual planting rate (Committee on Climate Change 2019).

In the UK, the market for carbon offsetting through forestry is not mainstream, with individual stakeholders brokering bespoke deals between private landowners and emitters. The government’s £50 million Woodland Carbon Guarantee was launched to stimulate the marketplace, and will set a baseline carbon value.

If the global voluntary offsetting market is indicative of future domestic trends, the market will almost certainly expand. Globally, the volume of offsets generated through forestry and land use activities increased 264% between 2016 and 2018. In comparison, the volume in all other offset types grew just 21% (Ecosystem Marketplace 2020). Coupled with the increasing offsetting demand from multinational corporations, the woodland carbon marketplace offers significant opportunities.

Barriers to planting

While increasing new woodland planting levels is an excellent endeavour, there are barriers to planting trees. The UK nursery stock of tree saplings is limited to orders the nurseries know will be fulfilled, with a one to two year lag time to produce new stock to meet changes in demand. Woodland creation also requires prior approval as a change of land use from agricultural production and this process can be time-consuming. Once approved the land cannot be reverted to farmland, which can deter owners of better quality land to consider a change of use. Finally, there is a relatively limited area within the UK that is suitable for tree planting – it is important not to compromise other economic land uses, biodiverse habitats and protected ecosystems just to reach tree-planting targets.

A policy focus on climate mitigation and the development of the private offsetting market risks using carbon sequestration as the only indicator of success. On the downside, this could incentivise mass tree-planting schemes with little regard for location and species specificity. Without doubt, the woodland carbon market offers exciting new income streams for forestry, however, planting must be appropriate – in the right place and for the right objectives, which must include production of sustainable, quality timber.

_{Read the articles within The Forestry Market below.}