The Environment Strategy for Scotland: Delivering the Environment Strategy Outcome on Scotland's Economy - Evidence Base & Policy Levers

5. Section C: Recommendations

The policy-lever recommendations in section C are grouped according to sector, which is the logical framing following the synthesis of Section A lever-domains and the ToC process, which took known lever-domains and sub-levers and grouped them to test short, medium and long-term outcomes against economy sectors. In essence, Section C therefore takes off from the end of the ToC process in Section B.

5.1 Net zero economy recommendations

5.1.1 Electricity

Emissions from electricity supply in Scotland have fallen dramatically in the past decade as renewable electricity generation increased nearly threefold between 2009 and 2019.^[399] The emissions reduction pathway in Scotland’s updated Climate Change Plan aims to achieve zero emissions from electricity supply in 2029. At the same time, Scotland’s electricity supply will need to accommodate increased demand, particularly from heating (heat pumps), transport, or electrification in industry. Specific targets are currently missing for renewable energy storage.

Public investment

As mapped out in our theory of change for reaching net zero territorial emissions in Scotland, the potential role of public investment and subsidies in transitioning to net zero electricity supply spans from supporting local energy schemes through grants and subsidies all the way to the direct delivery or investment in large-scale renewable energy generation and storage facilities. However, generation, transmission, distribution and supply of electricity is a reserved policy area, considerably limiting the scope for independent SG policy. There is potential to increase the broad social benefits accruing from the energy system to encourage a just transition to net zero.

Recommendations:

• Work with the UKG and Scotland’s industry to maximise the social value from private investment in renewables, including through increased local content (supply chains based in Scotland) and employment – one specific approach could be through the ongoing review of future Contracts for Difference rounds that is considering ‘non-price’ factors (e.g. local supply chains) in upcoming auction rounds.
• Expand the opportunities available under the SG’s Community and Renewable Energy Scheme (CARES) to support the development of community energy projects at a larger scale than currently seen in Scotland - similar to examples of ‘Bürgerenergie’ in Germany, Denmark, or Austria.
• Advocate to the UKG for a publicly-owned clean energy generation company that would ensure that Scotland’s communities reap the benefits of local natural resources rather than foreign investors - similar to EDF in France, EnBW in Baden-Württemberg (Germany), or Vattenfall in Sweden.

Regulation

Regulatory levers in relevant policy areas are largely reserved to the UKG, including a reform of the electricity market and directed phasing out of non-renewable electricity generation technologies. The UK needs a fit for purpose regulatory framework to facilitate the transition to net zero electricity supply.

Recommendations:

• Advocate to the UKG for the fast development of a market design for a fully decarbonised, resilient electricity system that is flexible, promotes the participation of smaller players, provides incentives for the development of new renewable energy projects, and ensures that the low cost of renewable energy is passed on to households.

5.1.2 Buildings

As covered in Section A, the emission reduction pathway in Scotland’s updated Climate Change Plan sets out to reduce annual emissions from buildings to 2.6 MtCO2e by 2030, a 71% reduction on the sector’s emission in 2021. Following the Climate Change Commission reporting and methodology, emissions from construction and embodied carbon in buildings are not covered in this section but under industry.^[400]

Public investment

Public investment plays a crucial role in decarbonizing Scotland’s buildings, and particularly in improving energy efficiency and installing low carbon heating in the existing building stock across residential, commercial, and public buildings and across all tenures – social homes, owner-occupied homes, and homes in the private rented sector. Adequate local authority funding will be needed to enable the use of other levers including the monitoring and enforcement of standards, or effective use of planning powers. The next steps to improve effectiveness in this sector for a net zero economy should include meeting the levels of funding that the CCC has assessed as necessary to hit net zero targets and expanding the focus into the private rented sector, which has received relatively less attention to date, including through greater funding for local enforcement capacity.

Recommendations:

• Allocate funds that are commensurable with Scotland’s ambitious targets to decarbonise the building stock. For example, Germany’s Climate and Transformation Fund allocates an equivalent of more than three times per capita annual funding to building retrofit than the commitment in Scotland’s Heat in Buildings Strategy.
• Address the existing lack of emphasis on improving energy efficiency and heating in the private rented sector. While prioritising fuel poor households is commendable, Scotland will need to increase the existing financial support programmes and incentives offered to non fuel-poor households if it is to meet its targets.
• Adopt an area-based approach centred on communities and local authorities in order create good, low carbon jobs, support local supply chains, and ensure that communities benefit from local multiplier effects. A number of local authorities in Scotland have made progress on growing local supply chains and supporting the creation of good work opportunities through community wealth building pilots. The scale of building improvements needed across Scotland presents a unique opportunity to scale up local authority activity in this area.
• Provide sufficient funding to local authorities and build planning and enforcement capacity locally. This is necessary to help close the existing performance gap between predicted and actual performance of buildings. Without adequate funding at a local level, other key levers including building and heating regulation, local planning, and enforcement will fail.

Regulation

Regulation and standards have driven much of the historical progress on improving energy efficiency of buildings, from building codes to heating systems and households appliances, and regulation continues to be a key lever for achieving Scotland’s goals. While some relevant powers including product standards are reserved to the UKG, regulation pertaining to building energy standards, as well as relevant planning powers are devolved policy areas. As noted earlier in this report, there is currently a lack of robust regulation for energy efficiency and heating in existing buildings after proposed regulations were deferred in 2020.

Recommendations:

• Consult, finalise and table legislation in line with Scotland’s Heat in Buildings Strategy, alongside delivery plans including adequate public investment allocation as outlined above/below and funding for local authorities.
• Progress with EPC reform as per the CCC recommendations, building on the ongoing consultation on EPC reform.[401]
• Fully assess the potential for using climate change burdens to secure reductions in emissions from privately-owned land and buildings and should scale up their use where possible.

5.1.3 Transport

Emissions from transport account for the largest share of Scotland’s territorial emissions and have fallen only very slightly in the past decade. The CCC recommendations highlight several gaps in the SG’s ambitions, including no existing commitment on reducing demand in aviation.^[402]

Recommendations:

• Adopt a 2030 aviation demand reduction target in line with the CCC’s pathways to net zero. To meet the targets set out in the updated Climate Change Plan which exceed in ambition CCC’s Balanced Pathway, the SG needs to aim for a 13% reduction in aviation demand on 2019 levels as set out in CCC’s Tailwinds scenario.

Public investment

To reduce emissions from transport in line with its commitments, the SG will need to ensure that public spending and subsidies across all modes of transport and infrastructure align with its targets. Public investment is needed to enable modal shift to more sustainable modes of transport, the greening of transport fleets, and to help reduce the overall number of journeys taken across Scotland. Stronger funding and plans to deliver the 20-minute neighbourhoods approach will also help to reduce transport emissions.

Recommendations:

• Re-prioritise all current and future transport spend to reflect the SG’s commitments to reduce emissions from transport. In particular, the SG should re-consider spending earmarked for increasing or subsidising private road travel, and direct it towards public transport, place-based transformation, and decarbonisation of shipping.
• Increase spending on public transport with a focus on the provision of a reliable, affordable and green bus service in Scotland’s rural areas, including through publicly owned transport services. Roll-out the committed spending on bus priority measures on roads and motorways.
• Increase local authority funding to support NPF4 implementation and introduce an adequate capital spending plan to bring 20-minute neighbourhoods in Scottish towns and cities.
• Invest in decarbonisation of the maritime sector in line with CCC recommendations, including zero-carbon fuels, vessel technologies shore power and electric recharging infrastructure at all of Scotland's major ports.

Regulation

Many regulatory levers remain reserved to the UKG, including vehicle standards, fuel efficiency, or sustainable fuel mandates. Some progress has been made in areas of devolved responsibility including the introduction of low emission zones in Glasgow, Edinburgh, Dundee and Aberdeen, and place-based policies, public transport and plans to enable public transport franchising legislation.

Recommendations:

• Franchise public transport and deliver integrated nationwide fare structure ensuring that the cost of public transport is cheaper than the cost of driving – such as Austrian ‘Klimaticket’ with standard local, regional and national multimodal travel rates.
• Provide transitional support in the form of grants, subsidies, or low-interest loans ahead of the start of low emission zone enforcement, and consider phased implementation allowing sufficient time for affected individuals and businesses to adjust.

5.1.4 Industry

In 2019, emissions from industry were 9.6 MtCO2e (23% of Scotland’s territorial emissions), compared to 12.4 MtCO2e in 2009 (or 23% of Scotland’s territorial emissions in 2009).^{[403] [404]} The emission reduction pathway in Scotland’s updated Climate Change Plan sets out to reduce annual emissions from industry to 7.3 MtCO2e by 2030, 24% reduction on the sector’s emission in 2019. This target reflects the relative difficulty in reducing emission from industry, with the majority of emission reduction expected to happen between 2030 and 2040. ^[405]

• Public investment

Key investment levers to decarbonise industry remain reserved to the UKG including strategic investment in energy hubs and clusters or industrial electrification. At present, Scotland’s prospects of meeting its objectives in industrial decarbonisation depend on securing more investment from Westminster.

Recommendations:

• Work with Westminster to secure more finance for decarbonising Scottish industry under the UKG’s cluster approach to decarbonisation, and step up funding available for private firms to alter their internal production services and product design.
• The current focus on hydrogen and carbon capture aligns with long-term economic opportunities, but Scotland also needs to focus on imminently reducing the carbon footprint of energy-intensive industries through technologies currently available at commercial scale. These include improving energy and resource efficiency, fuel switching via electrification and the use of sustainable biomass, and accelerating the substitution of carbon-intensive materials with alternatives (e.g. in construction).

Regulation

While much of regulation remains reserved to the UKG, there are significant areas of devolved responsibility including environmental and pollution standards in industry, or building regulations which can drive change in the construction industry.

Recommendations:

• Set resource efficiency targets for key energy-intensive and high emission industries and improve data collection to enable better monitoring of progress. Implement resource efficiency regulation in devolved areas of industry.
• Implement whole life carbon policies through building regulation, planning policy and infrastructure planning to encourage use of renewable construction materials and drive decarbonisation of Scottish construction industry.

5.1.5 Development planning

The fourth Scottish National Planning Framework makes good strides to incorporating net zero and nature positive outcomes as central principles in the development management process. Furthermore, the addition of the national spatial plan within the Framework helps set clear priorities for specific strategic investments.

However, the SG, in conjunction with Scottish Local Government Authorities, needs to recognise the limits of planning-as-regulation in ensuring that new development and re-development in Scotland delivers fully sustainable and just places.

The SG therefore should consider a greater range of options for enabling Local Government in Scotland to invest in and direct local economic development needs in their areas. In particular, the SG should look to international examples of upfront capital investment for transport led development, expenditure on public led land assembly at existing use values, and local revolving infrastructure funds which enable local government to benefit from the gains of land value uplift. Vauban (Freiburg, Germany), Ijburg (Amsterdam, Netherlands), Hammarby (Stockholm, Sweden) are examples of places that have adopted alternative development models in which local government takes a proactive rather than reactive approach to development in order to use land value uplift to ensure that communities are developed sustainably with low or zero carbon buildings, a range of active and public transport choices, and at densities which avoid sprawl and biodiversity loss.

Without such an approach, the SG will still be able to focus on national infrastructure projects, but will not be able to break the link between development and negative emissions and biodiversity loss at source. The SG needs to lead place development, including with greater upfront investment in amenities and infrastructure, to ensure high-to-full levels of public and active transport use and more compact development to avoid continuing car dependency, sprawl, and high materials use being permanent outcomes of the development system.

Recommendations:

• Assess opportunities for local government bodies in Scotland to take a more proactive role in planning and developing places that are compatible with a net zero, nature positive and circular economy, drawing on good practice abroad. This is likely to require working with the UKG to make legislative changes applying reserved powers as well as making use of some devolved powers. Some of the levers considered may include:
• Increasing funding to local planning departments to resource them to undertake more proactive planning, rather than reactive.
• Potential uses of CPO powers to enable land assembly.
• Models such as development corporations that allow a more proactive approach to planning at a neighbourhood scale.
• Options for how revolving infrastructure funds or lending from the Scottish National Investment Bank can be used to finance the upfront costs of creating these neighbourhoods.
• Legislative changes that would enable the public to capture more land value uplift from development, via approaches such as land readjustment or strategic public land ownership (as used successfully in countries such as the Netherlands and South Korea).[406]

5.2 Nature positive economy recommendations

5.2.1 Conservation and restoration of nature

Protecting and restoring areas of land and ocean for nature will be an essential part of any mission to restore biodiversity and create a nature positive economy.^{[407], [408],[409]} This will require a set of interventions to increase the natural areas that are protected, restored and returned to nature.^[410]

The SG is aiming to protect 30% of Scotland’s land and seas for nature by 2030 under the 30x30 goal,^[411] and also has an outcome in the Scottish Biodiversity Strategy to achieve protected areas covering 30% of land by 2030. This will require rapidly increasing from the status quo, in which 18% of Scotland’s land area (c. 14,000 km²) is currently protected and a further 5% (c. 3,900 km²) is national parks.^[412] As discussed in Section A, public funding appears better suited to delivering this increase in conservation than private funding (which would come with risks to a just transition and technical issues around an inherent lack of profitability). In light of this, it may be necessary to explore other levers such as taxation or public borrowing for nature investment to deliver a just transition in conservation and restoration. The SG has very limited borrowing powers at present, which could present an obstacle to investment in conservation unless further devolution can be agreed. The forthcoming Biodiversity Investment Plan offers an opportunity to consider these issues in depth. Another component of the approach could involve using the Compulsory Purchase Order (CPO) powers of National Park authorities to buy additional land and manage it for biodiversity^[413] and restoring these powers to Forestry and Land Scotland (FLS).

In terms of the approach to restoring nature, there is potential to further incorporate re-wilding approaches into SG policy, including by using recent recommendations for its application from NatureScot^[414] and by building on good practice from rewilding projects that include local communities, as highlighted by the Scottish Land Commission.^[415]

There is potential to apply novel policy levers to achieve better biodiversity outcomes on privately owned land in the long-term. Two such approaches described earlier in this report are conservation burdens that could be scaled up between public organisations and landowners who are well aligned with nature positive goals, and potential legislative options to vest the ownership of biological carbon in Crown Estate Scotland to better manage its condition and maintenance.

Recommendations:

• Increase investment in nature conservation and restoration, funded by a redirection of existing subsidies (see separate section on agriculture) and taxation via environmentally linked taxes (see separate section above) or in the longer term, via general progressive taxation. However, the SG’s tax powers are limited, meaning that funding from this source may require further devolution or action by UKG.
• Invest to replicate successful models of inclusive rewilding across Scotland, building on existing good practice.
• Restore and maximise use of CPO powers to bring land into public ownership for nature restoration and restore CPO powers to FLS.
• Fully assess the potential for using conservation burdens to secure long-term biodiversity improvements on privately-owned land and scale up their use where possible.
• Explore longer-term options for vesting the ownership of biological carbon in Crown Estate Scotland.

5.2.2 Forestry

The effective management and protection of Scotland’s forests will form an important part of achieving the nature positive mission. Forest cover in Scotland rose from 4.5% in 1905 to 19.1% in 2022,^[416] but remains substantially lower than many EU countries, where the average forest cover is 39%.^[417] Although many different types of forest cover can support biodiversity, it is important to distinguish between uses with relatively high biodiversity value (such as mixed or semi-natural woodlands) and commercial forestry (which is not always of high biodiversity value). However, given the potential for forests to contribute to the nature positive mission, and to capture and store carbon for net zero,^[418] there is a need for further ambition to restore forest cover in Scotland to move closer to the EU average. However forestry receives less grant support relative to the land area covered than agriculture at present and there is potential to adjust the design of forestry grants to maximise social impact and encourage a just transition in the sector. There has been a sharp increase in private investment in rural land and forestry in recent years due to a combination of factors (not all of which are related to SG policy levers). While an increase in investment in the creation of forests is necessary for the net zero and nature positive missions, it is important to achieve this in a way that distributes the costs and benefits of the transition as equitably as possible across Scotland’s population. This may mean using policy levers such as taxation, regulation or grant design to recapture some of the high financial returns that investors are receiving in the sector or to further incentivise public-owned or community-owned forestry.

Recommendations:

• Increase funding to FLS to accelerate the rate of land acquisition for afforestation and to support its other activities in nature restoration.
• Increase SG support to community-led forestry projects.
• To contribute to a just transition where the benefits of nature-related investment are broad-based, recalibrate policy measures in the sector to recapture some of the gains accruing to large investors in forestry, potentially using levers such as changes to taxation, reforms to forestry grant design, public interest tests and taxation of carbon units.^[419] Some of the most relevant tax levers for the sector are reserved to UKG, meaning changes would need to be negotiated at that level.
• Cap the amount a single landowner can receive under the Scottish Forestry Grant Scheme to ensure that the funding is distributed in a way that is more compatible with a just transition.

5.2.3 Agriculture

As noted in Section A, agriculture is one of the largest contributors to biodiversity loss in Scotland, through its direct effects on nature (intensive use of soil and land, pollution via pesticides and fertilisers) and through the use of land that could otherwise support higher biodiversity, for example as semi-natural habitats or under conservation measures.^[420],[421] Biodiversity losses have been driven, in particular, by a trend towards increasing intensification of agriculture, which has become more pronounced in the past 50 years.[422] At the same time, certain lower intensity forms of farming can benefit biodiversity, for example by preventing undergrazing.^[423] The complex relationship between Scottish farming and biodiversity poses a challenge for adapting international recommendations to the local context. There is a need for further evidence on the impact of existing farming practices on biodiversity and a clearer definition than is offered in the Vision for Agriculture of what sustainable and regenerative agriculture will look like to give greater clarity to SG policies on the sector’s contribution to the nature positive mission.

Food production and supporting biodiversity are not mutually exclusive. However, given the finite area of land available for uses such as conservation and forestry, reducing the land footprint of agricultural uses such as livestock, dairy and non-food production could make more land available to support biodiversity while maintaining a secure food supply. In addition to rebalancing land uses in this way, there is potential to improve the management of existing agricultural land to reduce its negative impact on biodiversity and encourage positive contributions to biodiversity. The Scottish agriculture sector is heavily reliant on public subsidies in terms of the proportion of farmers requiring subsidies to break even. There is a clear recommendation from the international literature to reduce the subsidies currently supporting harmful activities, such as the overuse of fertiliser and increasing intensification (both harmful to biodiversity) and the forms of farming that have relatively higher emissions.^{[424], [425], [426], [427]} The reduction of these subsidies can also contribute to a just transition, as they tend to benefit a small number of producers whereas the costs to biodiversity and emissions fall on every member of society.^{[428], [429], [430]} Ahead of the forthcoming Agriculture Bill, the SG is developing a new system of subsidies with a greater link to the net zero and nature positive missions. It has stated that at least half of all funding to farming and crofting will have enhanced conditionality by 2025. However, it is currently unclear what weight will be given to payments under the tiers that are conditional on environmental impact versus the base level payments with weaker conditionality.^[431] As noted in section A, there appears to be significant potential for a transformative impact on biodiversity via a more ambitious shift in subsidies in favour of nature restoration and conservation.

Recommendations:

• When putting the Vision for Agriculture and the Agricultural Reform Route Map into practice,^[432] reform payments to farmers with a heavy emphasis on meeting net zero and nature positive goals. This would make subsidies heavily conditional on nature positive (not just less harmful) activities such as conservation or rewilding. There is potential to drive a rapid transformation from unprofitable and environmentally harmful forms of farming towards conservation and restoration of nature. This is likely to be most effective in subsectors that are more reliant on subsidies. This subsidy reform could achieve a fairer outcome for the population as a whole, by investing public money in national natural capital. It could also offer a more inclusive way of restoring nature that involves local residents, relative to the alternative of commercial afforestation.
• Undertake an assessment of national land use in light of the nature positive and net zero missions and goals for sustainable food production, exploring the balance of different forms of farming, areas of conservation, forestry, industry and urban development to meet these missions. This would allow consideration of the ideal mix of these activities, with subsidies used to achieve this mix, as opposed to the existing approach of minimising the environmental impact of current land use without significantly altering the mix of uses.
• Undertake a deeper assessment of the impact of existing agricultural production on biodiversity and nature, to understand which activities in the sector need to end to achieve the nature positive goals, and which parts of the sector can incrementally reduce their impact.
• Focus greater attention on the compatibility of policies such as the food and drink sector strategy and rural development policies with the nature positive mission.

5.2.4 Fisheries

As in many countries, Scotland’s fisheries have been subject to overexploitation in past decades, leaving stocks at reduced levels^[433] and having negative knock-on effects to the abundance of other marine species.^[434] There have been some improvements in certain important commercial fish stocks in recent decades. There is still much room for improvement, given that 28% of the most important commercial stocks are currently not being fished sustainably (i.e. are being overfished). Outside of a small number of economically important fish species, very little is known about the majority of unmonitored and unregulated fish populations.

The challenge of fisheries management in line with the nature positive mission is multifaceted, requiring a combination of conservation of protected areas of sea and sustainable management of the remaining exploitation of fish stocks. Governments are advised to extend the coverage of Marine Protected Areas (MPAs) and increase public investment in their designation and management.^[435] The SG is aiming to protect 30% of Scotland’s seas for nature by 2030 under the 30x30 goal and MPAs already cover 37% of sea area^[436], albeit not all of these MPAs have the fisheries measures in place at present to ensure that they are managed effectively. Current MPAs globally have widely varying levels of protection, meaning that some of them have failed to achieve their environmental goals.^[437] A recent study covering most of Scotland’s inshore area found that the way in which these MPAs were managed was “unlikely to significantly reduce the fishing pressure to which benthic habitats and species are exposed”.^[438] This suggests that improvements to the siting and management of MPAs could improve biodiversity outcomes in Scotland’s inshore seas.

The type of restriction can also be an important factor in achieving nature recovery at sea: bottom-contact gears (including the gears used by trawlers) are known to have a significantly more harmful impact on marine fauna and sea-floor carbon storage.^{[439], [440], [441]} Research discussed in Section A indicates that there is potential to improve the combined economic, social and environmental outcomes of fishing activity through a spatial ban on bottom-contact fishing in some areas of Scotland.

The distribution of quotas to small fishers (boats of under 10m in length) is an important consideration for a just transition, as this group is less economically resilient than the large players in the sector and has typically received a very small share of the overall UK quota.^[442] These small fishers are also likely to fish in a way that is less harmful to nature by using more selective gears, meaning a quota redistribution has the potential to improve environmental outcomes in the sector.^[443] Initiatives to increase the quota share distributed to the 10 metre and under sector would need to be phased in and agreed in collaboration with those fishers to ensure that technical factors are aligned for successful implementation.

A further priority for a just transition should be the working conditions in the sector, especially offshore, where there is emerging evidence of poor conditions and labour abuses, particularly for migrant workers, and recent legislative changes will not be sufficient to reach all of the affected workers.^[444]

Recommendations:

• Increase public investment in MPAs to allow for better management and enforcement of the areas under protection.
• Implement increased spatial restrictions on bottom-contact fishing across a wider area of Scotland’s seas and provide sufficient resources to enforce these measures, to reduce the damage to marine ecosystems that these gears cause.
• Consider ways to recalibrate regulation of the sector to maximise the combined economic, social and environmental net benefit, such as redistributing a greater proportion of the fishing quota towards small fishers.
• Collect evidence on labour conditions in the sector, act on existing evidence through stricter enforcement and remove loopholes that exclude migrant fisheries workers from UK employment standards, so that the Fair Work First standards are implemented for all workers in Scottish fisheries.
• Review subsidies to the fishing sector and their impact on biodiversity and work with the UKG to remove fuel subsidies to the sector.

5.2.5 Aquaculture

Aquaculture is an important primary sector of the Scottish economy, with farmed salmon making up over one third of national food exports in 2021.^{[445], [446]} Although the sector has the potential to form an important source of sustainable food supply in a nature positive Scotland, it faces issues with its current environmental impact, as highlighted in Section A.^[447] There appears to be an evidence gap on the environmental impact of finfish farming in Scotland (especially in light of the recent growth of the subsector).^[448] Other forms of aquaculture, such as farming of oysters, mussels and seaweed, typically have far less negative environmental impact but are small economically relative to farmed salmon.^[449] As shellfish aquaculture and seaweed farming are less capital intensive than finfish aquaculture, they have lower barriers to entry for new local business formation (which could contribute towards a just transition), whereas the finfish farming sector is highly concentrated in the hands of a few large companies, some of which are foreign-owned.^[450]

The recently published Vision for Sustainable Aquaculture places a greater emphasis than before on developing the sector within environmental limits and improving community benefit. However, there is potential for conflict between these outcomes and others focused on attracting investment and improving international competitiveness, unless the former environmental and social outcomes are prioritised.[451] Given the recent issues with the sector’s impact on nature mentioned above, there is a need for more evidence on the environmental impact of the sector to inform more effective regulations via national and regional marine plans, if the sector is to be compatible with the nature positive mission.

Recommendations:

• In light of the rapid growth of the sector, the likely risks to nature from certain forms of aquaculture and the lack of detailed evidence on the sector’s impact on nature, continue to invest in building the scientific evidence base as a foundation for how the sector is regulated.
• Direct funding towards lower-impact forms of aquaculture, such as shellfish aquaculture and seaweed farming. Consider options for incubating local start-ups in these forms of sustainable aquaculture. There is also potential to apply stricter conditions to the Marine Fund Scotland grants, requiring that all projects address biodiversity outcomes, which would favour the aforementioned forms of aquaculture.
• Prioritise environmental outcomes in the upcoming sectoral vision, with an outlook that frames the economic sector as existing within Scotland’s ecosystems, rather than a focus on mitigating the damage from the sector or framing environmental outcomes as an added bonus to economic growth.

5.2.6 Supporting private investment

A range of perspectives on the role of private finance in achieving the nature positive mission is offered by the international literature. Most studies agree that private finance will have some role to play, since the scale of investment needed exceeds the available public finance mechanisms and the pool of private capital is far larger than public funds.^[452] The SG’s current approach supports a heavy reliance on private finance for both the net zero^[453] and nature positive^[454] missions. However, it is important to consider the implications of this approach, as outlined in Section A of this report. There are potential issues to applying private finance in some cases due to scale, profitability and the need to ensure a just transition that fairly shares the benefits and costs of transition investment.

A more detailed assessment is needed of where private finance is most appropriate. The current estimate of the scale of private finance required for nature in Scotland (£20bn over ten years, based on a 2021 Green Finance Institute study)^[455] operates on the assumption that no additional public funds can be committed to this investment - calculating the gap between the authors’ estimates of the cost of nature investment to achieve current strategies, and the existing public spending committed. As noted in Section A, this significant assumption should be subject to closer scrutiny, by developing a more detailed analysis of the suitability of different nature investments for private investment and the other options for funding.

As it implements its commitment to a public sector partnership to develop a high integrity, values-led market for responsible investment in natural capital, the SG should incorporate the lessons from past use of blended finance, including enhanced “transparency and scrutiny of how value for money is considered as part of decision making, the costs and benefits of using private finance, and the management of risks and outcomes delivered”.^[456] Binding social and environmental outcomes, similar to those expressed in the Interim Principles for Responsible Investment in Natural Capital, would also help to ensure investments achieved their nature positive aims.

In addition to raising additional funds through progressive taxation (e.g. income tax for higher earners), other alternatives to blended private finance include public borrowing and green bonds (albeit under current powers this is capped at £450m per year),^[457] negotiating an increase to borrowing limits and capital grants with the UKG or significant legislative change to allow bond issuance and lending to public bodies by the Scottish National Investment Bank.^[458] Additional options include crowdfunding digitally for green investments from citizens through models such as Community Municipal Investments, which is being implemented currently by a handful of local authorities in England to fund clean energy investment.^[459]

Recommendations:

• Conduct a bottom-up multi-criteria assessment of required nature investments that assesses where private investment is more or less suitable and considers alternative public funding options, to generate a clearer picture of the finance gap for nature investment.
• Ensure that any private investment in nature positive projects is governed by binding criteria for social and environmental benefit such as those expressed in the Interim Principles for Responsible Investment in Natural Capital, and that the details of blended finance arrangements are subject to sufficient public scrutiny in line with the recommendations of Audit Scotland on PFI approaches.
• Assess the potential for certain nature investments to be funded through green bonds and the options for green bond issuance.
• Consider options for funding nature positive investment through progressive taxation powers that are currently available, such as the top rate of income tax.
• Work with Westminster to secure powers for broader forms of taxation such as land tax, wealth tax or corporation tax, and an increase to borrowing limits and capital grants where the relevant investment is required by the net zero and nature positive missions.

5.2.7 National measures of success and incorporating biodiversity into government policy

The international literature on achieving a nature positive economy places substantial emphasis on the adoption of national measures of success that are broader than traditional growth and output metrics, such as including measures of natural capital alongside financial or physical capital.

The SG already has 81 indicators within its National Performance Framework, including the Natural Capital Asset Index (NCAI), giving it a solid foundation from which to further incorporate these indicators and approaches. NatureScot notes that “the NCAI is a good indicator of terrestrial habitats’ contribution to wellbeing, but it does not account for Scotland’s considerable marine habitats and does not demonstrate changes in biodiversity or a habitat’s resilience to outside pressures.” They suggest that “some of these shortcomings can be assessed using the newly developed ecosystem health indicators”, but it doesn’t appear that these are being routinely used by the SG.

The next step after developing improved measures of success is to incorporate them into the everyday operations of the SG. As noted in Section A, this would involve mainstreaming biodiversity and natural capital into all relevant strategies, plans, programmes, policies and projects; setting time-bound targets, roles and responsibilities (in the Government) on biodiversity; strengthening inter-ministerial coordination on biodiversity; and developing indicators to monitor progress on the mainstreaming of biodiversity within the Government.^[460] When implementing the new nature restoration targets contained in the forthcoming Natural Environment Bill, there will be an opportunity to advance the process of mainstreaming biodiversity across the Government. This could be done by requiring contributions towards nature restoration targets across different Government portfolios, in a similar way to the contributions to statutory climate targets and reporting that are already in use.

Complementing this approach, biodiversity goals could also be applied directly in fiscal policy. To do this, the SG could use green budgeting tools such as social cost-benefit analysis that includes nature outcomes; quantify its own biodiversity-related spending and that of the Scottish National Investment Bank; and assess the impact of public spending on biodiversity with a focus on the expenditure that harms biodiversity.^[461] Budget proposals are assessed against climate change (emissions) impacts at present but not against biodiversity impacts.

Recommendations:

• Continue to develop the NCAI to improve its coverage of marine habitats and other important outcomes raised in assessments.
• Incorporate the nature positive mission into all future SG policies and strategies (starting with the targets from the forthcoming Natural Environment Bill) and assess ways to monitor this mainstreaming of biodiversity (e.g. regular reviews to check progress) and potential to set up new inter-departmental groups to improve coordination on the nature positive mission.
• Apply green budgeting to quantify the public spending contributing to improved biodiversity in each year’s budget, with an aim to increase this as a proportion of total SG spending.
• Assess the biodiversity impacts of budgets in a similar way as is currently done for net zero.
• Conduct an assessment of the negative biodiversity impacts of current public spending, which should include an analysis of subsidies to land-based and extractive economic sectors and tax treatment of these sectors.

5.2.8 Business disclosures and financial and companies regulation

The gap in understanding among companies and the financial sector on their nature-related impacts, dependencies and risks often leads to nature being invisible when key decisions are made and supports conditions in which businesses continue to degrade biodiversity.^[462] There are various ways in which governments could increase the consideration of nature by companies through the regulation of business and financial disclosures.

As outlined in Section A of this report, the SG is already working with public bodies and via Scottish Enterprise to help them better align their decision-making with the net zero, nature positive and circular economy missions. Financial and companies regulations are reserved policy levers, which limits their current immediate use for these missions in Scotland, but there may be opportunities for collaboration with the UKG to strengthen use of these levers.

One recommendation that is more relevant to the SG is to embed biodiversity goals in core public finance institutions and policy, including in climate finance facilities and national planning. For example, the Scottish National Investment Bank has a mission for net zero but not one explicitly focused on a nature positive economy.^[463] Given that the Bank’s current missions are likely to lead only indirectly to investments that improve biodiversity (e.g. through its investments in afforestation for net zero reasons), it would be a positive step to give the nature positive goal a similar level of priority to net zero by incorporating it into the Bank’s missions directly.

Recommendations:

• Include a more deliberate emphasis on creating a nature positive economy in the missions of the SNIB
• Collaborate with Scottish businesses to increase the rate of voluntary measurement and disclosure of nature-related risks and impacts
• Explore options for influencing UK-wide financial and companies regulations to require nature-related disclosures by companies and the consideration of nature risks in financial decision-making

5.3 Circular economy recommendations

As outlined earlier in this report, the level of circularity in Scotland’s economy at present is far lower than other peer countries, meaning significant further progress is needed. Waste reduction and recycling targets are ambitious but are likely to be missed without large-scale and rapid system change.

The initial route map to 2025 consultation highlighted several new measures across different packages, targeting specific areas ranging from household recycling to circular construction practices. The approaches suggested in the route map are comprehensive but governance and delivery will pose significant challenges – as is evident with the attempts to roll out the deposit return scheme which has already been deferred by several months. Some directions for further progress towards a circular economy, based on what has worked in other countries, are outlined in the recommendations below.

Recommendations:

• Provide incentives for businesses to invest in improving product and process standards, embedding circular practices from cradle to grave. The Netherlands consistently stands out as a pioneering example for business investments in a circular economy, driven by tax breaks and incentives such as the Environmental Investment Allowance and Arbitrary Depreciation of Environmental Investments, where firms can recoup taxes on profits commensurate to their investments in reducing their material footprint.[464] These incentives have translated to an investment of €3.5bn in 2022 in the Netherlands compared to just £1.5bn over the last four years in Scotland.[465] Such fiscal incentives, though powerful, are reserved to the UKG and Scotland should actively call on the UKG to strongly consider such measures, extending them to incentivising domestic households alongside businesses.
• Setting a clear target for reduction of per capita material use and intensity would be important in signalling intent and building the circular economy strategy around. Currently at 18.5 tonnes of material use per capita, Scotland needs to chart a path to reducing this to 8 tonnes, which is deemed sustainable. More broadly, and in accordance with the recommendations of several Scottish environmental charities, we recommend the Government adopt a similar governance approach to meeting its circular economy outcomes as it does on carbon targets. This could be done by requiring and tracking contributions towards circular economy goals from different Government portfolios, as is currently done for statutory climate targets.
• Explore how Extended Producer Responsibility (EPR), which exists in sectors such as plastic packaging, could be extended to the textile sector, with the aim of reducing the volume of textile related products consumed per capita and cutting down the waste associated with textile production.
• Explore specific incentives for consumers and businesses to promote the product-as-a-service model that encourages leasing and sharing of goods. Car-pooling, renting power tools or sharing company printers and copiers are some examples where employee incentives such as successful bike to work schemes could be replicated.
• Fully integrating Scotland’s climate change plans with any upcoming circular economy strategy will be critical in ensuring targets, policies, their governance and delivery are aligned.
• We recommend Scotland follow the example of Sweden and strongly consider consumption-based emissions in its climate change and circular economy plans. This could begin with using public money, through local and national procurement, to identify and drive down consumption emissions, subsequently expanding it to private investment.

5.4 Cross-cutting recommendations

5.4.1 Taxes, charges and fees

Taxation has the potential to support the net zero mission by dis-incentivising certain forms of economic activity that increase carbon emissions. As outlined in Section A, measures such as road user charging, local parking charges and permits, and workplace parking levies have the potential to drive a reduction in car travel and encourage a shift in favour of more sustainable transport modes. This could help to address the risk of missing net zero targets relating to a 20% reduction in car kilometres by 2030. Further taxation levers that could be applied to reduce car kilometres, such as vehicle excise duty and fuel duty, are reserved to the UKG. Another area of transport emissions where action is needed according to the CCC is in aviation, and there is potential for a well-designed Air Departure Tax to be used to disincentivise some air travel without disproportionately affecting those most vulnerable (see Section A). In nature-related sectors, there is potential to remove existing non-domestic rates exemptions to raise revenue for nature restoration and to put these sectors on a par with other industries and land uses. It may also be possible to use the Land and Buildings Transaction Tax (LBTT) to help to discourage the concentration of land ownership by adjusting its application to owners of multiple landholdings. The OECD recommends that governments should apply biodiversity-relevant taxes as part of a suite of instruments to drive a transition to a nature positive economy, which could include a tax on pesticides or on fertilisers, albeit a lack of devolved powers may form an obstacle to introducing these taxes.

Recommendations:

• Accelerate the introduction of road user demand management schemes (before 2025) to achieve the required reduction in vehicle kilometres travelled by car, and work with local councils to maximise the use of road user charging, parking permits, charges and workplace levies to disincentivise unnecessary car journeys.
• Using powers under the Air Departure Tax, develop and introduce a tax measure that is progressively structured to reduce unnecessary air travel in a just way. This could potentially take the form of a frequent flyer levy (if administrative and legislative circumstances allow for this) or an air departure tax with first-flight discounts.
• Remove the exemption from business rates for timber companies and finfish aquaculture firms.
• Raise the level of LBTT for agricultural and forestry land on par with the rate for residential land, and consider options for an LBTT surcharge to larger landholdings or multiple plots of land with the same owner.
• Explore options (in light of Scotland’s devolved powers and the Internal Market Act) for implementing taxes on pesticides and fertilisers to reduce their use in agriculture, forestry and aquaculture.

5.4.2 Skills and advice

The transition to a net zero and nature positive economy will require particular skilled workers. For net zero, shortages of skills have been identified in tree-planting, peat restoration, data analysis and project management for the local delivery of complex buildings decarbonisation projects.

Skills policy needs to not only train up new entrants to the workforce, but also equip the current workforce with the necessary skills to contribute to the low carbon economy. Policies on skills actively align with wellbeing outcomes, but more detail is needed on skills needs and policies for outcomes like nature restoration and circular economy. For example, the CESAP mentions the importance of circular economy skills but does not provide a clear methodology that defines these skills or any strategy.

The CESAP likewise does not offer much detail on nature-based jobs and skills but could be refined using evidence from a 2020 NatureScot assessment of the topic.^[466] While the Nature-based Jobs and Skills Action Plan 2022-23 provides a detailed list of the nature-based jobs needed for the future and actions to develop these, it lacks a clear timeline. ^[467]

Recommendations:

• Produce a clear timeline for the development of skilled workers, setting out the actions that are needed to deliver the necessary skills over the next ten years.
• In addition to developing a pipeline of skilled personnel newly entering the workforce, place an equal focus on ensuring that the current workforce has the necessary skills to contribute to the net zero, nature positive and circular economy.
• Work with all relevant agencies, including Skills Development Scotland, the Scottish Funding Council, and the Scottish Cities Alliance, to ensure action in the following areas:
• A better understanding of the principles of a circular economy and the identification of the skills that are required to deliver it
• Tree planting and peatland restoration skills development programmes to scale up the number of entrants into these sectors and build a skilled workforce large enough to deliver the requisite rates of activity for net zero in line with CCC advice
• Identification of key skills gaps in the sectors critical to the transition to a nature-based economy and development of training in those occupations
• Supporting Local Authorities to remedy the technical and analytical skills gap relating to the decarbonisation of buildings
• Developing workforce skills to build and maintain zero-emission vehicles
• Encouraging more students into STEM subjects throughout primary and secondary education
• Consider the merits of developing Higher Technical Qualifications
• Developing skills in Green Finance options
• Providing careers advice and awareness of the green economy targeted at young people (14 to 19) and adults (25 to 44)

5.4.3 Innovation and research and development

Innovation and R&D policy for net zero and nature positivity in Scotland can do more across both the public and private investment spheres, including across higher education research and small and large business R&D.

As a starting principle, the SG should be aware of the most effective ways it can influence R&D and innovation. Much private business investment in R&D is currently incentivised by the system of tax reliefs which is not a devolved competency for the SG. Additionally, a proportion of the higher education institutional R&D system is supported by UKG funded research councils and departmental funding.

Nonetheless, the SG can still have significant impact across the academic and business spheres of R&D and innovation in two key ways, as follows:

Ø Setting a prioritised framework for institutional R&D

The SG should set a clear framework of principles and priorities for the areas in which higher education and collaborative R&D can have maximum impact in Scotland for both net zero and nature positive outcomes. This should provide guidance and leadership to both business and research institutions as to the strategic areas in which the SG will support and encourage new R&D. In particular this should include explicit encouragement and support for R&D that:

Has a spatial focus which reflects the different requirements of the significantly diverse geographies of Scotland. At present, much research takes place within research institutions within Scotland’s central belt and is often not spatially focused or diversified.

Is specifically targeted to areas which interact with and support the public investment capabilities of the SG. For example, this would include R&D in just transition areas which will need some degree of public-led initiative, particularly because they involve networks or spatial requirements which mean they have features of public goods, first mover dis-benefits or natural monopolies, and which will therefore be unlikely to be delivered effectively or at all by the private sector on its own. For example this would include:

• Large energy storage and transmission facilities
• Networks – for example for alternative heating, electric charging, etc.
• Public transport stocks and inter-modal infrastructure.

Focuses on encouraging R&D in the most hard to decarbonise sectors, which are the least attractive to most research because there are less easy-wins or clear next steps for R&D. These sectors will include: aviation, shipping, energy storage, construction materials.

Builds-in consideration of nature positive outcomes into net zero R&D and innovation, even if it requires broadening the scope and resource requirement of an R&D project. For example, ensuring that negative marine biodiversity impacts are considered and captured upfront in R&D for new offshore wind.

Building on the recently published National Innovation Strategy,[468] the SG should continue to formalise its support for innovation and R&D which tries to overcome the kinds of market failures as set out above. For R&D to achieve maximum impact, it needs to focus on the hardest market failures in the hardest to improve sectors. Formalisation of these strategic priorities could include a written framework identifying the ways in which the strategy’s Energy Transition priority can support innovation for a net zero, nature positive and circular economy, as well as providing resources to work with R&D institutions or businesses to support applications for funding that best meet strategic priorities.

Ø Understanding and mitigating against path-dependency in private sector R&D

Scotland has good business support service organisations, but they need full understanding and ability to overcome private sector market failures in business innovation and R&D for net zero and nature positivity. In particular, business support services provided – such as finance or start up support provided by SNIB or Scottish Enterprise – will need a strategy for overcoming existing problems of path-dependency within business R&D and innovation. The challenges of path-dependency mean that the most radical sector-changes required may not take place because it is easier for businesses to tweak or amend existing practices and approaches rather than adopt entirely different ways of doing business.

This means that greater levels of support should be made available for businesses who are able to show that they are investing in first-mover innovation, which has a clear rationale for how it will open new markets in clean technologies or services.

5.4.4 Procurement

The way in which the Scottish public sector spends on contracts can influence the development of economic activities that support the creation of a net zero, nature positive and circular economy and can shape economic behaviour. As outlined in Section A, there is potential to use this lever to switch food procurement to healthier vegetarian or vegan meals, which would directly reduce the public sector’s impact and help to encourage a shift in diets among public workers and pupils. Procurement also offers a way to increase circularity in parts of the public sector while helping to develop more circular supplier companies in the process, and can be used to maximise social value outcomes such as job quality, diversity and skills development to encourage a just transition.

Recommendations:

• Switch food procurement to vegetarian food across all SG catering and explore a switch to vegan food as standard.
• Assess the potential to procure from circular economy product-service systems across all departments and implement a plan to increase the proportion of circular suppliers to the SG.
• Develop new contracting guidance for public procurement in sectors such as buildings and transport to secure outcomes relevant to the net zero, nature positive and circular economy missions, as well as broader outcomes on job quality, diversity and skills.

5.4.5 Consumer information

Consumer information, such as product labelling, may be a useful lever to encourage a shift in behaviour away from consumption that creates high emissions or damages biodiversity. Among the recommendations of the international literature on this, there is a focus on sectors with a major impact on nature such as meat and dairy production and fast fashion (the latter through the production of materials). Labelling can be used to clarify the impact of a given product on emissions and nature and thus how compatible it is with a net zero and nature positive economy, though a caveat to this lever is that research has found that other factors such as price and convenience tend to have a larger influence on the food people purchase than information.^[469] Consistent labelling of shelf-life can help to increase circularity in food systems.

Recommendations:

• Consider options for food labelling schemes to clearly show the emissions and nature impact of different foods to consumers at the point of purchase.
• Continue working with sectoral organisations to improve consistency of practice and labelling on shelf-life.