Our Thoughts
Tue, 15/02/2022 - 12:00
· 4 min read

The Carbon Conundrum: Looking Ahead and Acting Today

"What can corporates or financial institutions do if they've done everything else; they have tried to make their buildings or processes more efficient and less carbon-producing, but there's still a gap between what they have to deliver by a certain date?"

This was a question posed by Edward Daniels, Head of Forestry, John Clegg & Co, as an introduction to a panel discussion on carbon markets at BNP Paribas Real Estate's Capitalise webinar.

Carbon markets fall into two categories: compliance and voluntary.

Compliance is the regulated market of offsetting described by Thomas Jamie, Head of Commodity Derivative Sales, BNP Paribas, as "cap and trade". Businesses have carbon offset allowances, but as demand rises, the price rises. The idea is that increasing costs act as a stick to reducing carbon emissions.

For those that aren't bound by regulations but are keen to mitigate their impact ahead of regulations further down the line, there is voluntary offsetting. Aside from avoidance and reduction, there are a variety of strategies to mitigate against carbon emission, from investing in green energy generation such as solar, to natural solutions to sequester carbon.

Daniels emphasised that offsetting is a stop-gap and needs careful consideration, for example, investing in land and planting new woodland. New woodland has to be validated by the woodland carbon code but once certified; it can be used to offset carbon or traded.

But this is different from investing in commercial forestry, which doesn't carry the same certification.

"We acted for a large housebuilder to acquire a piece of Scottish Hill ground, recommending how to plant and manage it for the long term. That will sequester over the long-term period in the region of 40,000 carbon credits," he explained.

Peatland restoration is another area that is gathering more interest. But in both instances, it is about development risk because there are things outside the investor's control. The forestry commission and local authority will influence what type of woodland you can plant, for example.

The Government has a target of planting 30,000ha of woodland by the end of the next parliament, but it is a mixture of broadleaf trees in different locations – the balance of biodiversity is critical.

"Different woodlands sequester different amounts of carbon over a period of time," said Daniels. "You need an investor who can take decisions without knowing the final answer."

Careful consideration also needs to be given to the landscape and the local community. Jason Beedell, Head of Rural Research, BNP Paribas Real Estate, explained: "Don't just think about carbon, think more broadly and try to quantify the impact. If you buy land and significantly change how it's used, you're going to get asked, and rightly so, what the local impacts are going to be."

While carbon offsetting can look like greenwashing, how it is measured and certified is helping to build trust and credibility. The woodland code, for example, is 10 years old.

Beedell said: "You're not going to get a precise answer as to how many carbon credits you're going to generate, but you'll get a fairly good answer before you start the planting project."

The peatland code is also Government-backed and quite mature.

"Where we do need more metrics are for markets like soil carbon. There's a lot of interest, particularly from people who own land, in increasing their soil carbon and selling those credits," he added.

A soil carbon code, with Government backing, is being developed but not yet available. Beedell said the scale of the soil carbon market could be much bigger than woodland or peatland.

But regardless of the size of the market, it comes back to meeting carbon neutrality targets and viewing carbon offsetting as a last step. Jamie explained: "I wouldn't view it as a speculative asset or as a revenue stream, it is a cost. But it is a way to take into account that social aspect of the carbon footprint which a company has."

Generating your own carbon credits through creating woodland or peatland restoration can feel like a positive step for a business rather than merely buying a certificate. But it's not a quick win.

Beedell pointed out it will take about two to three years to find, buy and plant land, and then about five years for the trees to grow enough to start sequestering carbon. This timeline takes you up to 2030, a potential zero carbon target deadline.

"So today, maybe even tomorrow is the time to call it," he said.


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The Carbon Conundrum: Looking Ahead and Acting Today