Environmental Policy: International background
We set out below a brief timeline of international policy agreements which have helped create the current climate of tradeable environmental credits:
1. UN Framework Convention on Climate Change
Signed from 1992-1993, this is the treaty that established the annual COP conventions we see today. It also saw developed countries commit not to further increase their greenhouse gas emissions after the new millennium. This was the first UN agreement recognising global warming as a serious international threat and laid the diplomatic groundwork for a variety of further agreements.
2. The Kyoto Protocol
2.1 Signed on the 11th December 1997, and becoming effective in 2005 this was the first international agreement for the reduction of greenhouse gas emissions. 192 nations are parties to the protocol, of whom 52 made legally binding commitments to reduce their emissions levels relative to what they were in 1990 in the period leading to 2012, when the Protocol was set to expire. Of these 38 committed to further reductions up to 2020 under the Durban Action Plan. The extent of the reduction was set by each nation individually. The UK’s commitments were to reduce emissions by 12% (based on 1990 emission levels) up to 2012, rising to 20% by 2020. Both of these targets were met.
2.2 The Kyoto Protocol implemented two key concepts relevant to landowners:
2.2.1 Emissions trading: This allows nations which have not met their commitments to purchase emissions permits from those that had. The aim here was to incentivise those nations which had met their commitments to benefit from going further. This system operates strictly between nations. It is not to be confused with the UK and EU Emissions Trading Systems (see below), which use trading of emissions permits between businesses as a means of reducing total emissions within a bloc.
The Kyoto protocol has now expired. However, a common criticism both at the time and beyond was that it was not ambitious enough in the emissions reductions it mandated. True to this criticism, many countries were able to quickly meet their targets under the Protocol, and now retain large stocks of offsets and emissions permits even though there are now no longer any Kyoto targets to which these relate. If and how these should be used for emissions trading under agreements following the Kyoto Protocol remains a point of diplomatic contention.
2.2.2 Carbon offsets: The protocol allowed signatories to offset their emissions by two systems:
- Investment into other nations to help their economies to grow in a way that is environmentally sustainable (the “Clean Development Mechanism”) or otherwise reduce their emissions (“Joint Implementation”)
- Changes to land use causing carbon to be removed from the atmosphere, such as woodland planting
2.2.3 Carbon offset under these means is unusual relative to modern carbon offsets in that it could be deducted by the nation who owns the offset’s total emissions to contribute to it meeting a legally binding target. All of these offsets were also tradeable between nations much like emissions themselves, and may continue to be depending on the future implementation of Article 6 of the Paris Agreement.
2.2.4 While it laid out much of the thinking behind current agreements and is crucial to understanding the history of where we are now, the Kyoto Protocol formally expired on the 31st December 2020. Its binding commitments were replaced by more stringent but less legally forceful pledges under the Paris Agreement – see below. In particular, Kyoto Protocol emissions trading rules have been replaced by Article 6 of the Paris Agreement, which has yet to be widely implemented.
3. The Copenhagen Accord
Signed in 2009, this was the first international agreement accepting no rise in global temperature further than 2°C. It also saw a commitment to extend the Kyoto Protocol beyond 2012, which happened via the Durban Action Plan mentioned above, and replace it by 2020, which did not happen. A small handful of countries pledged further emissions reduction. However, none of the commitments under the Accord were binding, leading many to question its ultimate effectiveness.
4. The EU Emissions Trading System (EU-ETS) and its UK offshoot
4.1 Formally adopted in 2005, this EU directive aims to reduce greenhouse gas emissions from aviation, electricity and heat generation and certain key sectors of heavy industry such as steel and chemical production. It does this by regularly producing a maximum figure for the total of emissions from these industries. Individual companies are then allocated permits for emissions based on the best performing firms in the sector, and they face financial penalty if, after the end of a set period, they do not have enough permits to cover their emissions. If they turn out to have more permits than required they can sell these to firms which do not have enough. Permits are then reissued based on the next target figure for a new period.
4.2 The EU-ETS was closely associated with the Kyoto Protocol from 2008 until that agreement expired. Trading of permits under the EU-ETS by businesses also factored into trading between nations under the Protocol, and companies could use Clean Development Mechanism and Joint Implementation offsets to meet their EU-ETS commitments. Offsets for land use changes were deliberately excluded, however – they could still be used by governments under the Protocol, but not by companies under the EU-ETS. As the Kyoto Protocol has now expired, this is no longer the case, and the EU has yet to include further offsetting under the EU ETS. However, the Paris Agreement (see below) lays out some basic ideas about how a carbon offsetting system should work, bearing in mind criticism that offsets under Kyoto Protocol rules faced criticism for corruption and lack of permanence. The EU has stated that it will consider how such units can be implemented in the future.
4.3 In July 2021, a number of amendments were proposed from Brussels to broaden the EU ETS. These include bringing maritime transport under the System and setting up a separate, parallel system for building construction and roadbuilding.
4.4 The UK was a key architect of the EU-ETS. Prior to the full scheme going live, a pilot UK Emissions Trading Scheme for the Union was in place from 2002, which informed the eventual System. Following leaving the EU, the UK has returned to having its own, internal emissions trading scheme, which was effectively anchored to the EU scheme until March 2021 and continues to operate under similar principles. The UK Government has previously tentatively mentioned incorporating offsets into its ETS, initially flirting with the idea in the 2017 Clean Growth Strategy. The 2021 Net Zero Strategy appears more concrete. The word “offset” is used little, presumably due to negative connotations it has picked from the aforementioned issues with offsets under the Kyoto Protocol. However, mentions of “land based GGRs [greenhouse gas reductions]” and discussion of how GGRs could be implemented into the UK-ETS appear promising.
4.5 There was some speculation that highways could be incorporated into the UK ETS mirroring EU proposals, but this was not mentioned in the Net Zero Strategy. One might speculate that, given their similarity in both objectives and function, it may be sensible to re-incorporate the UK ETS back into the EU ETS, perhaps allowing landowners a truly international market for carbon sequestration. However, we expect this to remain diplomatically impractical in at least the medium term.
5. The Paris Agreement
5.1 Signed in 2016, this requires each of its 193 parties to set a five-year target for emission reduction and climate change mitigation, with a collective objective of keeping the increase in global temperature significantly below 2°C relative to pre-industrial times (as in the Copenhagen Accord), and preferably below 1.5°C.
5.2 These five-year targets, or NDCs as they are known, are not legally binding, although the mechanism for reporting emissions is binding. This means that offsets with legal force, under the Kyoto protocol, were not explicitly included. Some scope for offsetting appears in Article 6 of the Agreement, which also allows emissions trading. However, this Article is particularly limited and obscure in its wording, and does not lay out a framework of how a compliant trading or offsetting system might work. Therefore, few such schemes are in operation.
5.3 The Paris agreement also included commitments for providing $100bn of annual funding for climate change mitigation to developing countries and further funding to compensate the harm these countries would suffer as a result of climate change.
5.4 The Paris agreement remains in force, so any commitments made at COP-26 would need to build on it and should be seen in the context of the non-binding NDCs.
6. The Glasgow Pact
6.1 In draft form at the time of writing, this is to include agreements to reduce methane emissions and deforestation, and to “phase down” the use of coal. It is also to include financial commitments to the assistance of developing countries affected by climate change.
6.2 In addition, the COP26 Glasgow summit saw the creation of a document instructing the UN Subsidiary Body for Scientific and Technological Advice to formally investigate how Article 6 of the Paris Agreement, mentioned above, can be put into practice. This includes specifically “carbon mitigations”, an explicit euphemism for offsets following what many see as their poor implementation under the Kyoto Protocol. In time, this should lead to a new framework for multinational carbon trading perhaps on an even larger scale than the EU ETS, with carbon credits of some form looking set to play a defined, legally forceful role.
7. Domestic background: environmental policy and legislation in the UK
The point we have now reached is the result of a gradual build up of legislation and policy within the UK with stated objectives of protecting both the national and global environment. An understanding of those pieces of legislation which remain relevant, and recent policy on environmental matters, is key to understanding the direction of travel and the constraints in which the credits sit.
8. National Parks and Access to the Countryside Act 1949
This Act first provided for the creation of National Parks, Nature Reserves and Public Rights of Way, all of which remain in place today. This Act can be seen as an early acknowledgement of the value of “natural capital”, albeit not in those exact terms, by protecting valuable sites and landscapes for the benefits they provide, and promoting general access to the countryside to improve public health in the wake of the Second World War.
9. Forestry Act 1977
This is the key piece of legislation protecting woodland in the UK. Under the Act it is illegal to fell trees unless either an exemption applies or a licence has been granted by the Forestry Commission. Although the parliament of the time was focused just as much on timber production as biodiversity, this Act is a cornerstone to the permanence of carbon sequestered under the Woodland Carbon Code.
10. Wildlife and Countryside Act 1981
This far-reaching Act combined a number of historic laws while also adding a variety of new provisions. Today it provides basic protections for wildlife in the UK as an end in itself including making all unlicenced shooting of birds illegal. It also created a key new form of protected designation, the Site of Special Scientific Interest (SSSI). The protection of “biodiversity” is mentioned explicitly, and the Act also specifies a number of particularly important threatened species. Any improvements to biodiversity from farming activity must be supplementary to these basic protections.
11. Town and Country Planning Act 1990
This is the key piece of legislation upon which the UK planning system is now based. It requires the Government to produce a National Planning Policy Framework, upon which all local plans must be based, and provides requirements as to what this framework must contain. There are key environmental elements to this, including for the protection of locally significant sites and landscapes even when not nationally designated, and in particular for the protection of nationally designated sites such as SSSIs. It was recently amended under the Environment Act 2021 to also require almost all development to provide a “net gain” in biodiversity.
12. Countryside and Rights of Way Act 2000
This is another wide-ranging piece of legislation, building on the 1949 Act to further promote public countryside access, while also introducing the further landscape designation “Area of Outstanding Natural Beauty” and strengthening some wildlife protections under the 1981 Act
13. Climate Change Act 2008
This historic Act enshrines the UK’s oft-cited legally binding emissions reduction target, initially to 20% of 1990 levels by 2050 but now net-zero by 2050 following an amendment by order in 2019. It also contains government obligations to measure and report national emissions, and laid the groundwork for what would become the EU Emissions Trading System. Today it sets the legislative framework for the UK Emissions Trading Scheme, a system of greenhouse gas permit trading for certain industries into which land-based carbon offsets, such as peatland and woodland carbon, may at some time be incorporated, creating an increased demand and therefore additional value for this legal purpose.
14. Habitats and Species Regulations 2017
This is originally a piece of EU regulation, now brought into UK law following Brexit. It provides further protection to key sites and species considered to be of European importance.
15. Agriculture Act 2020
This is the Act which enabled DEFRA to move English farming subsidies from the EU’s area based “Basic Payment Scheme” to the more environmentally focused ELMS. DEFRA hopes this will transform farmland management in the UK. Schemes under this bill will remain a key income stream for farmers and should be considered as the baseline which the environmental credits mentioned herein will supplement.
16. Environment Act 2021
This is an exceptionally wide piece of legislation covering everything from urban tree protection to governmental oversight. Critically, here it also provides a requirement of developments to provide “biodiversity net gain” and provides “conservation covenants” as a legal tool for this. It also requires the Government to declare a “climate emergency,” as an insight into the state of mind which has brought us to this point.
17. Making Space for Nature: A review of England’s Wildlife Sites and Ecological Network (2010)
This damning independent investigation conducted on the government’s behalf is also known as the “Lawton Report”. It concluded that England’s habitats, many of them irreplaceable, had declined and were continuing to decline at an alarming rate and were already insufficient to provide the network of good-quality spaces needed by England’s wildlife. It then set out a plan for reversing this change that we require new sites as well as expansion and greater connectivity between and better management of existing sites. This has frequently been summarised as “more, bigger, better and more joined up”. As well as being a key influence on the ongoing development of agri-environment schemes, it is also crucial to understanding the context of biodiversity offsetting as a policy and its ultimate objectives in reversing the decline seen in this report.
18. Clean Growth Strategy 2017
This policy paper laid out the Government’s plans for environmentally friendly economic growth. It laid out a strategy for the countryside to encourage carbon sequestration, biodiversity and soil health, while keeping land “highly productive”. Use of offsets as part of the UK Emissions Trading scheme is briefly mentioned. Several of today’s clichés such as “leave the environment in a better state than how we found it” and “natural capital” became prevalent here.
19. A Green Future: Our 25 Year Plan to Improve the Environment (2018)
Building from the Clean Growth Strategy and to some extent the Lawton Report, this document laid down a set of actions to be undertaken to achieve long-term improvement in the UK’s environment. This was striking in that it crystalised the ongoing shift from managed environmental decline to government activity aimed at long-term improvement. It outlined, without detail, a variety of measures including those now familiar as biodiversity offset, ELMs and the Peatland Carbon Code.
20. Health and Harmony: the future for food, farming and the environment in a Green Brexit (2018)
This paper laid out then-Environment Secretary Michael Gove’s intentions for agricultural subsidy policy, which would later become enshrined in the Agriculture Act. More widely, it laid out the principle of “public money for public goods” supplemented by private sector funding which is precisely what we are now discussing in this publication.
21. Net Zero Strategy: Build Back Greener (2021)
Written to coincide with the Glasgow COP-26 summit, this sets out exactly how the government intends to reach the net zero target laid out in the Climate Change Act. This predictably affects all areas of society, with a number of implications for farming, from hinting at farm carbon “quotas” (our word) to suggesting the need to protect domestic agriculture from climate changes’ effects. Perhaps the most interesting development here is an explicit intention by the government to investigate how “greenhouse gas removals” (a phrase coined because “offset” has become somewhat politically charged) could be incorporated in the UK Emissions Trading Scheme – a clear step forward from the Clean Growth strategy.