Overcoming barriers to the engagement of supply-side actors in Scotland's peatland natural capital markets - Final Report

2 Introduction

2.1 Aims and objectives

The key aim of this project was to design and deliver a piece of primarily qualitative research with supply-side actors in Scotland's peatland natural capital markets to better understand their motivations and preferences for market participation, along with their perception of risks, barriers, opportunities and potential solutions to these. The research considered attitudes towards both public (e.g. Peatland ACTION, future agricultural support payments) and responsible private investment in peatland restoration, including different approaches to blended finance.

Blended finance is defined as any combination of public and private funding within the same project. Blended finance has the potential to decrease risk for private investors, while allowing public funds to be spread futher and allocated for greatest impact.

Supply-side actors are landowners, managers, and anyone with decision-making power to restore peatlands. Encouraging and enabling this group to fund their restoration is key to driving large-scale peatland restoration.

Specifically, the objectives of the research, summarised from the brief, were to:

• Incorporate a geographic focus, including three regions that Scottish Government is currently considering for the development of landscape scale peatland restoration pilots: (a) South of Scotland Enterprise (SOSE) region; (b) Loch Lomond and the Trossachs National Park; and (c) Highlands and Islands (with a focus on the West coast);
• Validate, refine and elaborate on barriers to participation and potential solutions identified in previously commissioned research on Mobilising private investment in natural capital;
• Conduct a concise evidence review to identify and summarise existing evidence relating to natural capital markets and the role of supply side actors in a Scottish context, including evidence relating to existing market uptake, barriers to uptake, potential solutions and key existing evidence gaps relating to supply side actors;
• Use the evidence review and a preliminary scoping exercise with key stakeholders to inform survey questions and discussion themes, piloting surveys and interview topic guides, and designing deliberative regional workshops;
• Include a diverse cross section of peatland natural capital market supply side actors in surveys, interviews and workshops, with a particular emphasis on large private estate owners and managers, including estates with different core objectives (e.g. conservation holdings including NGOs, mixed objectives and sporting / recreational estates), in addition to forestry managers, community landowners / managers and larger and smaller-scale in-hand farmers and tenant farmers, and crofters, with peatland on their holding (including peatland in different condition); and
• Integrate qualitative and quantitative analysis of surveys, interviews and workshops with financial modelling to provide a comparative analysis of current and future funding scenarios that integrate private finance using different mechanisms.

2.2 Context

The 2021 Dasgupta Review recommended significant investment in nature-based solutions to address biodiversity loss and contribute to climate change mitigation and adaptation, whilst delivering wider economic benefits (Dasgupta, 2021).

However, the need for large-scale, rapid deployment of funding into nature-based solutions is largely beyond the reach of current public funding commitments. The United Nations Environment Programme (UNEP) estimates that finance for nature-based solutions is currently USD 133 billion per year but needs to at least triple by 2030 and increase fourfold by 2050 to meet international climate, biodiversity and land degradation targets (UNEP, 2021; Deutz et al., 2020). The Green Finance Institute (2021) estimated that the gap between public spending commitments in Scotland and the funding needed to deliver climate targets for the land use sector via nature-based solutions is £9bn between 2022-2032, around 90% of which was based on the cost of reaching afforestation targets (Vivid Economics, 2020). Hollingdale (2023) argued without land acquisition costs, afforestation costs might be closer to £90M, and suggested that the sale of carbon credits may be necessary to meet the shortfall.

However, despite Scottish Government's multi-annual investment of more than £250M, significant investment is still needed to meet peatland restoration targets. Peatlands cover approximately a third of Scotland's land area (when afforested peatlands are included), and are critical for drinking water, flood risk mitigation, biodiversity and carbon storage (Bain et al., 2011). However, it is estimated that around 2 million hectares (75-80%) are in a modified or degraded state, and in their current condition, Scotland's peatlands are a very significant net source of greenhouse gases (GHGs) (CCC (CCC), 2022; NatureScot, 2022).

To support its net zero target by 2045, Scotland will need to restore the majority of its peatlands. Although public investment in peatland restoration has increased in recent years, it remains below what is needed (CCC, 2022). Current restoration rates (6,000 hectares per year) are around a third of the Government's target of 20,000 hectares per year, which if met, would still fall short of the CCC's recommendation of restoring 45,000 hectares per year (Figure 1; CCC, 2022). According to the CCC, "detail is required on how barriers…will be overcome" to significantly scale up peatland restoration in line with their proposed targets".

Unpublished data from Kana based on a survey of 100 FTSE 350 firms in 2022 and 2023 showed that 59% had "dramatically increased" their spending on carbon offset units over the last three years, with those closer to reaching net zero prepared to pay more per unit, especially if these units could be sourced from the UK. 76% wanted to increase their spending on UK offset projects but complained that there was a lack of availability of UK-based units. Unpublished data from the IUCN UK Peatland Programme, consulted as part of this research show that demand for peatland carbon is rising significantly and could in theory incentivise engagement with peatland restoration among the landowning community. However, the Peatland Code is currently generating carbon units on a relatively small scale (see evidence review in Appendices). Moreover, there are concerns about the scale and viability of the pipeline of peatland restoration projects to supply this demand. The CCC (2022) highlighted issues with skills shortages and contractor availability as a key constraint to the delivery of peatland restoration targets in Scotland. However, there are many other barriers that may be more important, especially on the supply-side of the market.

Hurley et al. (2022) identified a number of concerns among landowners, including concerns around failure of restoration works, long-term maintenance liabilities, power imbalances between large investors and landowners, and the need to retain carbon as insets in order to retain supply contracts in future. This research sought to validate, refine and elaborate on these barriers to engagement, seeking perspectives from different types of landowners, tenants, crofters, advisors and intermediaries, whilst further exploring the potential for some of the blended finance mechanisms proposed by Hurley et al. (2022) to overcome these barriers.

2.3 Purpose and structure of the report

This report provides a summary of the methods used, and a concise account of the key findings and policy options. A more detailed account of the methods, the evidence review, and details of financial modelling are provided in a series of accompanying appendices. The report comprises the following chapters:

• Chapter 1: Executive summary. A covering document which gives a succinct overview of the report, including findings and policy options.
• Chapter 2: Introduction. The aims and objectives of the study are articulated, along with a concise account of the context, including policy targets, challenges and previous research that this report builds upon;
• Chapter 3: Methods overview. The approach to the research is summarised, before detailing how a relevant sample of peatland managers was obtained for the three target regions, taking into account participant profile and land manager typologies. Methods are provided for the development of financial scenarios and the collection of empirical data via pre-interview surveys, qualitative interviews and regional workshops. The chapter concludes by describing the data analysis methods that were used;
• Chapters 4-6: Findings. Findings from survey, interview, workshop and modelling work are integrated to summarise feedback on two current opportunities (Peatland ACTION only versus Peatland ACTION with the Peatland Code) and two potential blended finance mechanisms (Peatland ACTION and Peatland Code with public support for maintenance costs, versus Peatland Code with guaranteed carbon price and public support for maintenance costs). The chapter triangulates findings using different methods in relation to each scenario and concludes by summarising a number of additional cross-cutting themes, including reasons to restore or not to restore, attitudes towards carbon finance, crofting considerations and taxing unrestored peatlands; and
• Chapter 7: Policy options. The main findings are summarised, as they are relevant to different audiences, including supply and demand side interests, Scottish Government, and agencies. Recommendations are made for the introduction of new blended finance mechanisms, adapted on the basis of feedback from the research, alongside a range of additional enabling policies that could help responsibly scale the operation of peatland carbon markets in Scotland. The chapter concludes with potential areas for future research.