Financial Solutions for Peatland Restoration: Additional Modelling Method and Results Overview

2. Methodology Note

2.1 Introduction

This section details the process that has been undertaken to provide the core analysis and supporting sensitivity analysis. The inputs that have been developed for the modelling can be found at Appendix 2, while the core assumptions can be found in the Assumptions Log provided in Appendix 3.

The assumptions were developed throughout the course of the project’s delivery, with initial assumptions being made around each of the various inputs and core working parameters of the economic model (e.g. project length and appraisal period, that the type of restoration activity would be the same across all vehicles explored, and the trading parameters for the sale of Peatland Issuance Units and Peatland Carbon Units). These, alongside other assumptions, were reviewed and refined by both the client team and the study team as more specific and reliable information became apparent and available during the value for model’s development.

It is important to view this model as endogenous in that the four shortlisted options are appraised against each other rather than external options outwith the appraisal. The preferred option is therefore identified and taken for further investigation.

2.2 Inception feedback

• there was a need to review all of the relevant guidance to ensure that the model and its subsequent analysis were Green Book compliant;
• that there were currently as yet identified opportunity costs and income opportunities for restored peatland;
• the model’s input values needed to be validated and refined with the best available information and data sources;
• that a stakeholder scenario workshop was needed to underpin the core analysis and help progress thinking around the financial vehicles; and
• greater detail around the detail surrounding the financial vehicles was required to ensure robust development of the model.
• HMT’s Green Book and Aqua Book guidance were referred to in this appraisal exercise as well as Green Book supplementary guidance including Accounting for the Effects of Climate Change and Enabling a Natural Capital Approach (ENCA).

2.3 Review of model inputs

In total, there were 48 values that fed into the development of the model. These can be split across those that are published in the Green Book and supplementary guidance, those that were found in supplementary research (e.g. from International Union for Conservation of Nature (IUCN) data, internal Scottish Government reports and other reputable secondary sources such as the OPIS Biodiversity Market Report), those calculated from the model, and those developed from the working knowledge and experience of the model’s authors.

In order to appraise the blended finance instruments and their costs/benefits to society, the private sector and the public sector, inputs were identified under the following headings:

1. Carbon Values;

2. Calculated Values;

3. Finance values;

4. Land values;

5. Resource (or additional income) values; and

6. Avoided Cost values.

Through the review of ENCA guidance, and its complementary Assets and Services Databooks, input values were able to be refined further. These included:

• Social carbon value;
• General recreation value;
• Biodiversity existence value;
• Hydropower value;
• Water value;
• Water quality value; and
• Flood reduction value.

Other central government sources of data included:

• UK Greenhouse Gas Inventory (for average emission avoidance);
• International Union for Conservation of Nature (IUCN UK) Peatland Programme UK Carbon Price Index;
• The Green Book (social discount value); and
• Internal Scotland’s Peatland Science and Technical Advisory Group (S/TAG) papers on peatland restoration costs.

2.4 Engagement with relevant stakeholders

Throughout the development of the model, there has been regular engagement with various stakeholders involved in peatland restoration across Scottish Government and NatureScot as well as Scotland’s Strategic Research Programme (SRP). This is detailed as follows, with Appendix 3 providing the assumptions that were developed through these discussions.

These included:

• Data consultation: This was general discussion between the research team and operational researchers in Scottish Government’s Rural & Environment Science and Analytical Services (RESAS) to present opportunity costs and potential income source assumptions, explore potential sensitivities for analysis, and to undertake a data consultation on the draft inputs to the economic model.
• Policy consultation: Undertaken with relevant peatland restoration policy stakeholders across Scottish Government in order to discuss core analytical assumptions, including estimated securitisation costs, maintenance costs, and fund management costs.
• Consultation with principal science advisor on emissions: To determine various factors influencing the emissions that can be sequestered from peatland, the abatement lag, emissions categories, and leakage.
• Options workshops: With the Scottish Government team to develop a greater understanding of the financial instruments that were shortlisted for analysis (the Peatland Code, the Individual Carbon Contracts, the First Loss Capital and the Project Finance instruments).
• · Scenario workshop: This workshop developed four scenarios against which the financial instruments could be tested, including parameters such as barriers to entry, rates of economic growth, affordability of restoration and so on. Details of these scenarios are set out in chapter 4.

2.4.1 Quality Assurance and Review Period

After finalising a draft model, the research team undertook a period of internal quality check and review by Scottish Government analysts. These identified residual calculation errors, areas where better alignment with best practice was required, and other aspects for improvement and enhancement in the economic model. These were stated and provided in a Quality Assurance Log, as per Aqua Book guidance. Despite these refinements, some limitations to the model remain, which are discussed in the next section.

2.5 Limitations of Modelling and Analysis

The development of this model has been undertaken with reference to the most up-to-date and relevant data and public sector guidance available at time of writing. However, given that peatland restoration is a fairly new sector for analysis and modelling, and working within the constraints of the project, the following limitations and assumptions were noted:

• As the current model is based on the most up-to-date and specific data and guidance currently available at time of writing, it should be noted that all input values are subject to change if further updated information or data becomes readily available.
• In order to keep the model reasonably simple and workable within the above constraints, fixed costs are assumed for the vast majority of project inputs, although real price increases are included in respect of the price of carbon. This is assumed to be 2% as per Green Book guidance. Going forward, real price increases across each input should be considered.
• Trading of credits (from the carbon trader perspective) are assumed to occur only once, and when landowners sell Pending Issuance Units (PIUs) to carbon traders these credits are then only sold on one further occasion after the original sale. In reality, there is the potential for each credit to be sold an unlimited number of times but, given uncertainty regarding what the typical flow of credits would be, the model assumes that the trading of credits occurs only once.
• Likewise, there may be a difference in price between Pending Issuance Units and Peatland Carbon Units (PCUs), resulting from there being a greater degree of certainty that the emissions sequestered are guaranteed from PCUs whereas the PIUs are developed on the assumption that the sequestering activity would take place. Given that, at time of writing, no PCUs have been issued under the Peatland Code, the model currently assumes that PIUs and PCUs will be sold at the same price.
• The model currently applies a uniform approach to all lags (e.g. carbon abatement, when ecosystem benefits come “online” and maintenance costs) across each area where a lag may be present, essentially scaling up over the first five years (the assumed period for restoration to reach the target date of 2030). Further research may uncover non-uniform or more appropriate approaches to lags in the future for users of the model to consider.
• Fund management costs have been assumed to be four times higher than the costs required for a similar (but smaller scale) agency that was explored for Highlands and Islands Enterprise^[2]. It may be possible to reflect real-world costs of fund management in this input section with more specific information and data being made available upon creation of the fund.
• Various resource values were also explored that have not been applied to the core analysis. In order to assess wider public benefits (e.g. biodiversity existence value, or general recreation value), some of these additional resource values have been tested as sensitivities.
• There was a request to explore reduced farm management costs as a result of peatland restoration, however, no values were identified for this throughout the development of the model. The model does include placeholders where these values could be included in the future.