Should woodland and peatland credits enter the UK ETS?

Posted on Friday, August, 30th, 2024

Forest Carbon’s response to the Government (DESNZ) consultation on ‘Integrating Greenhouse Gas Removals in the UK Emissions Trading Scheme’. 

If you’re an avid reader of our blog, you’ll remember that we shared an article in July 2023 about the possible inclusion of nature-based solutions into the UK’s Emissions Trading Scheme (UK ETS). 

For those not familiar with the UK ETS, it underpins our compliance carbon market and exists to incentivise decarbonisation across high-emitting industries. Learn more about the UK ETS on our Knowledge Base – The UK and Climate Change.

Including Greenhouse Gas Removal (GGRs) – the name given to methodologies that directly remove/drawdown carbon from the atmosphere – in the scheme has been in hot debate, particularly nature-based approaches which raise concerns regarding permanence, fungibility, costs, and wider land management impacts.

Earlier this month, the consultation seeking views on integrating GGRs in the UK ETS closed. Below we share some of our key insights on the potential risks and opportunities of integration.

We have included a jargon library at the bottom of the article for anyone who needs it – we appreciate there is a lot of technical language in this article, and have tried where possible to minimise it.

Should new ex-post woodland units generated in line with UK Woodland Carbon Code standards be considered for inclusion in the UK ETS?

The Woodland Carbon Code (WCC) is a high-integrity carbon removal methodology yet the market for Woodland Carbon Units (WCUs) remains largely unproven. Inclusion in the UK ETS could: 

However, potential roadblocks to consider include:

If the Authority does include new ex-post woodland units generated under the UK WCC in the UK ETS, should any changes be made to the WCC?

The Code is well respected and has high standards of integrity. However, to scale, it would likely require improvements. We believe there are both opportunities and risks when it comes to changing the WCC.

Opportunities

Risks/Considerations

How should the Authority manage potential reversal events from GGRs? 

  1. A pooled buffer, which already exists in both the Woodland and Peatland Code

  2. Fractionalised units (see above)

  3. Clarity in standard contracts on where liabilities sit. The difficulties in enforcing remedies on future owners would need to be overcome. Otherwise, delivery risk should be weighted more heavily on the end buyer. Current prices of UK PIUs in the VCM are reflective of trying to balance risk across the parties. The emergence of carbon insurance policies could also help.

Do you agree with the Authority’s assessment of peatland restoration? 

Whilst we recognise the reasons for the Authority’s decision to exclude Peatland Carbon Units (PCUs) from the UK ETS, we believe its exclusion to be detrimental to the UK's ambitions to reach future (legally binding) climate targets. 

It’s a perverse outcome to allow a peat bog to continue emitting whilst incentivising woodland creation next door. You could even argue that it has a greater detrimental impact on short-term climate goals than the positive impact created by a new woodland (which takes time). Both, of course, deliver much more in terms of positive impact than just Greenhouse Gas (GHG) removal/avoidance (water quality, biodiversity, flood prevention, etc.).

The Peatland Code is based on sound scientific data and methodology, but the market is yet largely unproven. Again, inclusion in the UK ETS (as well as further improvements to quantification and integrity) could be the vote of confidence buyers and sellers need to step up and enable market scaling.

This is particularly important in light of current public funding constraints in Scotland for peatland restoration. There is a clear requirement for other sources of funding to step up to enable this work to go ahead – without additional funding from the UK ETS/VCM the work won’t get done. With time running out to achieve science-based climate targets, we should be deploying all weapons in our armoury. Peatland restoration is a proven and powerful one.

In summary

We believe that incorporating nature-based solutions (NBS) into the UK ETS would be a positive step, as it sends a clear signal of confidence that is essential for fostering growth in our nature markets. Ultimately, this would mean more woodlands and healthy peatlands across the UK.

This move would help build trust on both the demand and supply sides by indicating that these projects are supported by an additional authoritative framework, lending credibility to what has so far been perceived as a relatively ‘unregulated’ market.

However, to be effective, issues must be addressed:

If you’d like to discuss or debate this topic with us or have questions, please don’t hesitate to reach out via our contact form or our social media channels.

Jargon Library:

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