Financial Solutions for Peatland Restoration: Additional Modelling Method and Results Overview
This report outlines the results of an analysis of four shortlisted blended finance models for peatland restoration in Scotland using an economic cost-benefit model.
6. Overarching Conclusions
6.1 Introduction
The following discussion sets out the overarching conclusions and suggested options going forward arising from this appraisal. Four shortlisted options were assessed via the economic model developed through this project. These were the Peatland Code (PC) as the business as usual option, Individual Carbon Contracts, Project Finance Vehicle and First Loss Capital. Chapter 4 concluded that, under the scenario selected for core analysis, the Carbon Contracts option comes out as the preferred option at this stage of the appraisal and should be considered by decision makers alongside other evidence.
6.2 Further Discussion
This analysis has identified a fundamental trade-off between two actors: landowners and carbon traders in the core modelled scenario. Similar to traditional farm product markets, the involvement of intermediaries (carbon traders) reduces the revenue retained by landowners.
This is due to landowners earning high margins on PC credits sold, with landowners receiving around £26 per credit, whilst their modelled costs are between £1.48 (for the PC) to £6.33 (for the First Loss Capital fund). These profits could be considered abnormal profits (when total revenue is greater than the total costs) in comparison to global markets, where investors typically do not wish to pay more than USD $10 per credit, with a view to selling credits with a 100% mark-up – at around USD $20 per credit. This disparity makes it difficult to establish partnerships between government and carbon traders because traders cannot compete with the current high landowner margins, who would be reluctant to accept lower prices. It should be noted that the PC attracts higher prices compared to global markets due to the high integrity nature of the code.
In this analysis, the mark-up between credits sold at the farm gate and credits sold to the offsetting carbon buyer drives the viability of a fund for the carbon traders. Another key driver is the depth of the peat beds restored, with several times greater revenue generated with deeper peats.
Therefore:
- The mark-up agreed by the steering group, and used in this analysis, is too low and results in the fund options (project finance vehicle and first loss capital) being not viable for carbon traders, and therefore no additional private sector leverage is generated.
However, viability can be achieved by considering the following strategies:
- Selecting a greater market-related mark-up and applying a discount to credits bought at the farm gate results in the fund options (project finance vehicle and first loss capital) being viable, and therefore generating private sector finance to support peatland restoration.
- Restoring deeper peatlands results in significantly higher revenue streams making fund options viable and therefore leveraging private sector funds to support peatland restoration.
6.3 Potential Options Going Forward
It is our view that the Scottish Government has several possible options to consider given the findings of the analysis, and these are:
Proceed with the more cautious assumptions of a low mark-up and restoring shallow peats, whereby only the Individual Contracts are available, where private sector funding would not be sufficiently leveraged to make the two fund options (First Loss Capital and Project Finance Vehicle) viable. In this scenario, Government goes it alone and essentially becomes the carbon trader for peatland carbon and can set value for money criteria.
- Or alternatively, embed peatland restoration carbon credits within the Emissions Trading System (ETS) that will subsequently generate high carbon credit prices in the compulsory market, allowing for a profitable mark-up for traders thereby crowding in private sector funds. In this option, landowners get to keep much of their abnormal profits (when total revenue is greater than the total costs).
- Or alternatively, focus on generating premium-value carbon credits in the voluntary market (where values of between USD $40 and USD $60 are currently achieved), where a profitable mark-up for traders can be achieved including some discounting of the credits sold at the farm gate. This will require cutting some of the abnormal profits earned by landowners and may require some regulatory pressure on degraded peatland owners to engage in restoring peatlands.
- Or alternatively, Government focuses on restoring deep peatlands as a start-up restoration phase, ensuring high revenue streams, which generates rapid escalation in cashflow, lowering risks for the private sector partners, and makes the blended finance instruments viable for private sector partners. This approach offers high levels of benefits to all three parties. Government (and society) gets best value for money, traders have incentives to get involved early, and landowners earn abnormal profits and the peatland offers significant incentives for the farm enterprise (with a 3 to 4 times increase in net income).
The optimal approach may include a carrot-and-stick approach, with Government engaging in both market-based and regulatory interventions where feasible.
A.1. Glossary
The following details the acronyms and core concepts that underpin the model.
Peatland Carbon Unit (PCU)
A Peatland Carbon Unit (PCU) is a tonne of CO2e emissions savings from a Peatland Code certified peatland. It has been independently verified, is guaranteed to have been achieved, and can be used to report against a business’s emissions as soon as it is purchased.
Pending Issuance Units (PIU)
A Pending Issuance Unit (PIU) is effectively a ‘promise to deliver’ a Peatland Carbon Unit (PCU) in the future. It is not guaranteed and therefore cannot be used to report against emissions until verified. However, it allows companies to plan to compensate for future emissions. At the start of a project, all units available are PIUs as the restored peatland hasn’t yet made any emissions savings.
Internal Rate of Return (IRR)
Internal rate of return (IRR) is a capital budgeting measurement used to determine the profitability of a potential investment or project based on predicted cashflows. Please note that this is more for additional evidence rather than driving government appraisal results.
Net Present Value (NPV)
Net present value (NPV) is used to calculate the current value of a future stream of payments from a company, project, or investment. To calculate NPV, estimations need to be made around the timing and amount of future cash flows, and a discount rate equal to the minimum acceptable rate of return needs to be decided.
Monitoring and Evaluation (M&E)
The monitoring and evaluation (M&E) costs associated with this model refer to the project evaluation costs, as opposed to the costs associated with Validation and Verification as explored below.
Emissions buffer
For PIUs, there is a need to include a buffer allowance to set aside and not commercialise to ensure validity of carbon credits, in the event of leakage or impermanence. The buffer applied is 15%, as explored in the assumptions log.
Price “at farm gate”
The “farm gate” price at farm gate refers to the fact that traders will purchase a landowner’s credits at a value below the market price, reflecting that farmers will have to offer a discount to traders.
Trader premium
Similar to the “farm gate” reduction in price, there is also a premium price built into the model, to account for carbon traders' transaction costs and profit margins, when trading credits.
Carbon curve
This refers to the total number of tonnes of co2e saved throughout the project, equal to the number of carbon credits generated per year.
Validation
Validation involves independent assessments by the appointed Certification Body to determine that the implementation of a project plan will result in the Greenhouse Gas (GHG) emissions reduction asserted. Validation occurs prior to restoration for predicted GHG emission reduction evaluation, during implementation, and also post-restoration work. It is assumed the validation costs are spread out over the first five years of the model.
Verification
Following successful validation and completion of the restoration activity a regular schedule of Verification Audits will be conducted by the appointed Certification Value to ensure the project achieves and maintains the expected condition category change, delivering the expected Greenhouse Gas benefit over its duration. It is assumed that there will be ten certification events, spread across the 90-year period.
Accessibility/Weighting for access
There is an option in the model to include a portion of the total area as difficult access, which would attract a premium of 3.5 times the “accessible” peat cost. This has been built using the restoration costs provided by Peatland S/TAG, as well as the assumption that land that has accessibility issues will be more expensive to restore.
A.2. Inputs Data
The following details the various inputs that have been researched, discussed and refined for use within the economic model.
6.4 Carbon Values
| Input | Published Value | Unit Value (adjusted to 2020 prices, where relevant) | Source |
|---|---|---|---|
| For a base case of hectares | None | 175,000 | Dashboard selection |
| Average emission avoidance (tonnes) | None | 2.82 |
The latest published emission factor for ‘Modified Bog (semi-natural Heather + Grass dominated) Drained’ as discussed, is 3.32 (±0.73). UK Greenhouse Gas Inventory 1990-2021: Annexes (defra.gov.uk) |
| Emission avoidance per ha CO2e pa (tonnes) | None | 2.82 | Dashboard selection |
| High end emission avoidance (tonnes) | None | 15.05 | Weighted average - calculated |
| Emissions buffer | None | 0.15 | Peatland Code V2 |
| Market price PCU – traders sell | None | £33.76 | The assumed price with a trader's markup for assembling and resale of credits |
| CO2e Trader premium - markup | None | 1.3 | |
| Market price – Woodland Carbon Code | £29.17 | £25.97 | The 2024 State of the Voluntary Carbon Market Report – Ecosystem Marketplace |
| PCU price at farm gate | None | £25.97 | Calculated from dashboard- baseline of zero markup. |
| Price PIU | £23.95 | £22.85 | IUCN UK Peatland Programme UK Carbon Price Index (£23.95 current price for 2022) |
| Social carbon value | None | £642.56 | ENCA Services Databook 3.1 |
| Validation costs | £14.13 | £13.48 | Dr Craig McKenzie approach of using Validation and Verification Fees for the Peatland Code list, supplemented by IUCN data on average project sizes |
| Verification costs (Year 5, then every 10 years) | £14.13 | £13.48 | As above |
| Carbon CO2e gains pa and carbon curve | None | 493,850 | Carbon credits per year - calculated |
6.5 Calculated Values
| Input | Published Value | Unit Value (adjusted to 2020 prices, where relevant) | Source |
|---|---|---|---|
| Project life CO2e total (tonnes) | None | 44,446,500 | Annual credits produced x project term |
| Total potential revenue at farm gate | None | £551,737,890 | NPV income at constant prices (except PCU prices) |
| Total costs to produce credits | None | £851,226,977 | NPV costs at constant prices |
| Income per credit at farm gate | None | £12.41 | Calculated – Peatland Code |
| Cost per credit for project | None | £19.15 | Calculated – Peatland Code |
| Annual income average landowner | None | £10,368.66 | Calculated – Peatland Code |
| Annual profit average landowner | None | £4,956.88 | Calculated – Peatland Code |
| Annual costs average landowner | None | £5,411.78 | Calculated – Peatland Code |
6.6 Finance Values
| Input | Published Value | Unit Value (adjusted to 2020 prices, where relevant) | Source |
|---|---|---|---|
| Interest rate | None | 2.5% | HMT Green Book (2022) |
| Social discount rate | None | 3.5% | HMT Green Book (2022) |
| Fund management pa | £350,000 | £333,959 | HIE Carbon Trade Facilitation Agency Model 2022 |
| Peatland securitisation costs | £188.57 | £167.86 | Assume £6m grows to £6.6m annual cost (over 5 years), and secures 35K ha per year for restoration – as per current forecast. This will imply a £188 per ha securitisation cost over the first 5 years. |
| Monitoring and Evaluation costs | £145 | £129.43 | Calculated - Assume a M&E cost of 10% of capital cost (£25.5m for 175K ha) or £145 per ha – to be spent in year 10. |
| Carbon price real increase per year | None | 0.02 | Agreed assumption |
6.7 Land Values
| Input | Published Value | Unit Value (adjusted to 2020 prices, where relevant) | Source |
|---|---|---|---|
| Land price hectare | £7,733 | £7,378.59 | The Scottish Land Commission's 2023 Rural Land Market Report suggests that the average price per hectare of farm land in the Highlands and Islands region in 2022 was £7,733 (selected as majority of peat land restored will likely be in this region, and is the most conservative regional estimate). This may seem particularly high though considering we are focusing on non-productive agricultural land, although unsure how to treat this for optimism bias. |
| Lease price per ha pa | None | £100 | Dr Craig McKenzie |
| Land value with restoration | None | No estimates have been located for elevated prices. There appears to be perceptions that restoration may increase the administrative burden for farmers - resulting in muted farm values. Some farms for sale with degradation advertise that degradation is present and therefore may offer a carbon trading opportunity - implying degradation may elevate value! | |
| Restoration maintenance per ha pa | None | £12.94 | Peatland Restoration Costs – Scotland’s Peatland Science and Technical Advisory Group (S/TAG) |
| Peat restoration costs per ha (weighted for accessibility) | None | £1,294.31 | Calculated in model |
| Restoration costs per ha | None | £1,294.31 | Peatland Restoration Costs – S/TAG. Cost per ha peat rest by Brown et al_2024 update - Klaus Glenk |
| Accessibility weighting premium | None | 3.5 | Assumption that there will be premium for inaccessibility costs to restoration. The cheapest high altitude sites were 3.5 times more expensive to restore than the cheapest low altitude sites in the following paper: Okumah, M., Walker, C., Martin-Ortega, J., Ferré, M., Glenk, K. and Novo, P. (2019). How much does peatland restoration cost? Insights from the UK. University of Leeds - SRUC Report. |
| Subsidy value per ha pa | None | £14 | Communication with Scottish Government Peatland team on relevant pillars, selected Pillar 1. |
| Opportunity costs pa | None | No value here as below values can be selected |
6.8 Resource Values
| Input | Published Value | Unit Value (adjusted to 2020 prices, where relevant) | Source |
|---|---|---|---|
| Sheep production per ha pa | £18 | £18 | Based on James Hutton Institute literature review, which stated running costs of £43/ha, and revenue of £61/ha, suggesting a profit value (and therefore an opportunity cost) of £18/ha. |
| Deer production per ha pa | £193 | £215.45 | Gross Margin for 100 hinds 19,251.00, @ 1 hind per ha, therefore £193 per ha. Starter guide deer farming park management |
| General recreation value per ha pa | £48 | £48 | ENCA Services Databook 3.0 |
| Hydropower per ha pa | £10.42 | £9.94 | UK Natural Capital Accounts 2023 |
| Water per ha pa | £77.43 | £77.68 | ENCA Services Databook 3.0 |
| Grouse hunting | £20 | £23.22 | Moran et al 2013, Grouse hunting between £20 and £100 per ha |
| Biodiversity credits pa | £23.63 | £21.03 | Note that the voluntary biodiversity credit market is currently underdeveloped so it's difficult to assign a market value at present. There seems to be one large scale rewilding project occurring in Scotland that is seeking to sell biodiversity credits, on the isle of Taransay. The developer is hoping to sell his voluntary biodiversity credits for $30 (£23.63) each. |
| Biodiversity credits at farm gate | None | £21.03 | Assume same discount at farm gate as carbon |
| Biodiversity existence value | £304 | £373.93 | ENCA Services Databook 3.0 |
6.9 Avoided Cost Values
| Input | Published Value | Unit Value (adjusted to 2020 prices, where relevant) | Source |
|---|---|---|---|
| Flood reduction value ha pa | £125.49 | £125.89 | Developing a natural capital account for flood regulation services provided by UK vegetation. UKCEH report to Defra, October 2022. Average of grass and shrub flood reduction values (interception and soil water storage) in Scotland is 267m3 per ha. Please note the caveat that peatland is assumed to fall into the grassland and shrub category here. Estimated average flood abatement value is calculated to be £0.47 per m3. Therefore 267 m3*£0.47 = £125.49 per ha pa value. |
| Water quality maintenance ha pa | £87.20 | £107.26 | Restored peatlands will enhance baseflow and therefore have greater pollution dilution capabilities. Published value (Morris and Camino, 2011 in ENCA Services Databook 3.0) is £436 per ha per annum. Assume 20% of published value due to upland areas having limited pollution but having high dilution capabilities - particularly in low flows. |
| Reduced farm management costs | None | None | No values identified |
A.3. Assumptions Log
1. Baseline Appraisal Period
Modelling assumption:
The appraisal period and assumed project lifetime has been defined to be 90 years, reflecting the mean anticipated project length of 87 years. Due to the manner in which the model has been developed, this is a fixed appraisal period as many of the formulae rely on this 90 year assumption. The model does not depend on any set programme start dates, but we have based prices to 2020 values as explored in Item 3 below.
Sources / explanation:
- Mean project length in Scotland is 87 years, and the median is 100 years This data is publicly available on the market registry.
- Peatland Code Registry | IUCN UK Peatland Programme (iucn-uk-peatlandprogramme.org)
2. Baseline Appraisal Scope / Historic Hectarage
Modelling assumption:
The baseline period is considered in terms of 2019-20 to 2029-30 with regards to financial years/funding rounds for peatland restoration under SG's Peatland Programme (delivered via Peatland ACTION (PA)). Financial Year (FY) start date of peat programme should be FY 2020/21 but 2020 for non FY. Based on the Scottish Government commitment to restore 250k hectares by 2030, including 'historic' hectarage restored between 1990-2020 and PA funded restoration to date, the base appraisal hectarage has been set to 175k hectares.
Sources / explanation:
- Historic hectarage (1990–2019/20) from NatureScot.
3. Base Year
Modelling assumption:
Costs and benefits in appraisal of social value are estimated in ‘real’ base year prices (i.e. the first year of the proposal), accounting for the impacts of general inflation. The base year for the discounting/deflating is considered to be 2020, due this being the start of the programme.
Sources / explanation:
- Green Book guidance that base year is assumed to be start date of proposal
4. Discount Rate
Modelling assumption:
The discount rate that we have modelled is 3.5%, as Green Book guidance and supplementary guidance indicates environmental projects should use this rate. Reflecting the manner in which natural capital does not depreciate in value to the same extent as built infrastructure, we have also included a "switch" for consideration (enabling a lower discount rate of 1% to be applied). The Green Book undertook a review for environmental discounting but agreed to remain with 3.5% as standard.
Sources / explanation:
- HMT Green Book (2022), Section 14.2-14.6
- Green Book Supplementary Document: Environmental discount rate review, conclusion – GOV.UK (www.gov.uk)
5. Capital Cost of Restoration
Modelling assumption:
We have provided figures relating to the restoration costs that equate to £1,454 per hectare, the central estimate value provided in Klaus Glenk April 2024 report for modified bog drained, deflated to 2020 values of £1294.31. There is an option in the model to include a portion of the total area as difficult access, which would attract a premium of 3.5 times the accessible cost. This has been built using the restoration costs provided by Scotland’s Peatland Science and Technical Advisory Group (S/TAG), as well as the assumption that land that has accessibility issues will be more expensive to restore. This higher value responds to the potential scenarios where insufficient non-active agriculture land is available for restoration.
Sources / explanation:
- Cost per ha peat rest by Brown et al_2024 update – Klaus Glenk.docx
- Discussions around accessibility of peat with policy team and desk research to determine the premium factor. The cheapest high altitude sites were 3.5 times more expensive to restore than the cheapest low altitude sites. How much does peatland restoration cost? Insights from the UK
6. Future Capital Costs of Restoration
Modelling assumption:
For core analysis, ekosgen have modelled assuming fixed restoration values for simplicity, except accounting for the aforementioned social discount rate for Net Present Value (at 3.5%) and a 2% real price increase in the carbon prices.
Sources / explanation:
- S/TAG paper, based on Klaus et al 2021 and inflation adjustments
- Glenk, Klaus; Glendinning, James; Martin-Ortega, Julia (2025). 2024 update of cost per area estimates matching land cover types reported in Brown et al. (2021) – using data based on Peatland Action grants. (SRUC).
7. Type of Restoration Activity & Emissions – Modified Bog Drained assumption
Modelling assumption:
The emission factors have been based on an assumption that 100% of peat restored will be within the "Modified Bog (semi-natural Heather + Grass dominated) Drained" type category. Rationale – the Peat Depth Survey data (2016-24) indicates that the majority of restored peat areas modified and/or drained are: modified 23.7%, drained 13.6%, drained: hagg/gully 13.6%, and drained: artificial 12.9%.
In reality, a combination of different categories of peatland have been restored to date, including some forestry, but in the absence of better data the assumption is 100% modified bog.
Sources / explanation:
- Scottish Government internally-sourced NatureScot Peat Depth Data and conversations with steering group and policy team.
8. Type of restoration activity and emissions – abatement lag
Modelling assumption:
Replicated previous Rural & Environment Science and Analytical Services (RESAS) modelling approach with lags – a "Light Degradation" period of 5 years. The RESAS internal model reflects reality as includes lags based on expert advice whereas GHG model immediately jumps to new condition category as they can't scientifically justify any lags. The model includes lags that science advisor finds reasonable from consultation – a uniform 5 years until eco-system benefits turned on and the sale of credits from Year 8 onwards.
Sources / explanation:
- RESAS model review.
- Consultation with Science Advisor.
9. Inflation Estimate
Modelling assumption:
The model assumes a 2% real increase in carbon credit prices based on central bank inflation target, and a social discount rate of 3.5% as per Green Book guidance. Other costs/values are fixed beyond this, to a base year of 2020.
Sources / explanation:
- HMT Green Book (2022) , Section 5.3
- https://obr.uk/data/
- https://www.gov.uk/government/statistics/gdp-deflators-at-market-prices-and-money-gdp-march-2024-budget-2024
10. Maintenance Costs
Modelling assumption:
In the internal S/TAG paper, low/central/high maintenance costs assumptions have been provided. This assumption is made as there is no better data.
Low – No maintenance costs.
Central – Maintenance costs are a one off 10% of capital costs at year 5.
High – Maintenance costs are 5% of capital costs every five years for 100 years.
The model assumes the "high" scenario assumption, as ultimately, it is anticipated that maintenance would be required at several stages spread throughout the restoration period rather than at one-off intervals.
Our model provides a figure of £14.54 per hectare per year (deflated to 2020 values of £12.94), on the assumption that this will equate to 5% of capital cost of the project every 5th year. For modelling simplicity, a 1% per annum is adopted.
Sources / explanation:
- Internal S/TAG paper, based on Klaus et al 2021. To note that RESAS and Peatland ACTION are currently undertaking survey work to update maintenance costs which is currently unavailable for this modelling approach.
- SG policy colleagues
11. Other Costs
Modelling assumption:
As part of our model, we have included a Fund Management Cost of £350,000 per annum (deflated to 2020 values of £333,959), based on previous research completed for HIE on the potential economic impact of Carbon Sequestration in Argyll and Bute. This can be "switched on or off" depending on the investment vehicle being explored (recognising that different approaches will require different inputs)
A peatland restoration facilitation or securitisation team is included. Assume the current £6m resource spend grows to £6.6m annual cost (over 5 years), and secures 35K ha per year for restoration, as per current forecast. This will imply a £188 per ha securitisation cost over the first 5 years, deflated to 2020 values of £167.86.
A Monitoring and Evaluation (M&E) cost in year 10 of the project was proposed by SG policy. Assume a M&E cost of 10% of capital cost (£25.5m for 175K ha) or £145.40 per ha, to be spent in year 10. This has also been deflated to 2020 values, to £129.43. M&E and reporting occur in year 5 and 10, and thereafter every 10th year, a total of 10 events. An average annual cost is used for modelling simplicity.
Sources / explanation:
- Fund management: HIE Optimising carbon sequestration opportunities for community wealth building in Argyll and Bute Business Modelling Report
- SG policy colleagues for securitisation, resource and M&E costs.
12. Opportunity Cost
Modelling assumption:
For modelling simplicity it is assumed peatland restoration occurs only on agriculturally inactive land in 2020-30. It is assumed there is no lost income as inactive land does not generate any commercial income nor any agricultural subsidies. It is assumed that farmers would not rationally choose to carry out peatland restoration on otherwise agriculturally productive land.
Evidence to support this from the Farm Payments and Peatlands Analysis Phase 2 Report or Peatlands and Payments work by Keith Matthews, JHI. There is ~300k ha peatland on unclaimed agricultural land in Scotland, which is more than the 250k ha commitment. To note that rough income figures for sensitivity analysis will come from analysis of Peat and Payments data.
Based on the assumption of agriculturally inactive land being targeted, our model has removed an "overall" opportunity cost consideration. Instead, we have provided various potential alternative income streams for the land, including sheep production (£30 per ha), stalking revenue (£193 per ha) and grouse hunting (£20 per ha). These can be "switched" to be included in the model where relevant- explanations of these income streams are provided in Assumptions 25, 26 and 27 respectively.
Sources / explanation:
- Alternative incomes farmers – peatland restoration programme, business case considerations.docx
- Arcgis – Peat and Payments
13. Carbon Emissions – BEIS Carbon Values
Modelling assumption:
We have arrived at an estimated figure of £642.56/ha for the social value of carbon. ENCA provides a Green Book value of £582/ha, based on an estimate of 2.2 tCO2e/ha saved from restoring from "modified" to "rewetted" status and a central estimate price of £248/tonne of CO2e using 2020 prices for 22/23. Using 2020 prices for 2024 (£256/tonne) and the selected condition category of "Modified degraded peat (2.51 tonnes/ha)" we have arrived at this value of £642.56/ha of peat restored.
Sources / explanation:
- Valuation of greenhouse gas emissions: for policy appraisal and evaluation – GOV.UK (www.gov.uk)
- ENCA_May 2024_Services_Databook_3.1 Final.xlsm (live.com)
14. Peatland Code Carbon Values (PIUs & PCUs)
Modelling assumption:
Using the latest published emission factor for ‘Modified Bog (semi-natural Heather + Grass dominated) Drained’ at 3.32, we have applied a 15% buffer following discussions with RESAS (between 10% of PC buffer and 20% for GHG inventory). This means that the core assumption in emission avoidance is 2.82 per ha CO2e p.a. To note that there is also a "high end" emission avoidance factor of 15.05 which can be switched on instead, which is a weighted average of the "Cropland Deep", "Extracted (industry)", "Extracted (domestic)", "Modified eroding bog-drained" and "modified eroding bog-undrained" category types, subtracting the aforementioned 15% buffer.
Sources / explanation:
- UK Greenhouse Gas Inventory 1990-2021: Annexes
- Consultation with RESAS.
15. Peatland Code Registration
Modelling assumption:
The model assumes that all projects/sites are registered with the Peatland Code for simplicity.
16. Peatland Code registry and additionality – level of private and public funding
Modelling assumption:
In the PC baseline option we have reflected that funding for restoration is 100% public, securitisation is 100% public, feasibility (validation) is 50% public/private (landowner), restoration maintenance is 100% private (landowner) and monitoring, verification and issuance is 100% private (landowner). On the additionality point, this is not factored into the model beyond a sense checking note at H68 of the Peatland Code tab stating that at least 15% of costs should be covered by the landowner.
Sources / explanation:
- IUCN internal data analysis: For validated PC projects in Scotland, around 86% of projects receive at least some public funding.
- Consultation with steering group
17. PC Validation & Verification
Modelling assumption:
See below for our approach to attributing, validating and verification values. On validation and verification costs, we have followed the same modelling approach as undertaken by Dr McKenzie (Edinburgh University) who developed a draft discounted cash flow model for peat restoration. That model was based on the 2022 PC pricing list, stating validation costs of £1.5k-£2k per project (and a rough assumption that the average project would be 50ha). From internal analysis of IUCN data, mean project size is 141.5ha, and we have updated the model to account for this. The validation costs per hectare are therefore £14.13, deflated to 2020 values of £13.48.
Note that the current pricing list only states that verification quotes will be provided on a case-by-case basis, so in the absence of any verification data yet we are following same approach as the McKenzie model and assuming these will be similar costs to validation.
Sources / explanation:
- 202206_IUCN Briefing Document_03 Crea9ng peatland restora9on projects Online.pdf (iucn -uk-peatlandprogramme.org)
- Dr Craig McKenzie training Discounted Cashflow (DCF) model held by RESAS
18. Sale of PIUs vs PCUs
Modelling assumption:
Trading of PIUs commences in year 1 and trading of PCUs in year 8. For modelling purposes some trades commence in year 7 to accommodate model timing complexity. Carbon credits accrue at 20% increments for the 1st 5 years, achieving 100% production in year 6.
Credits owned by SG are assumed to be sold and not retired. Credits owned by traders are sold on once. All credits owned by landowners are assumed to be sold on and not banked or retired for insetting.
19. Value of PIUs and PCUs
Modelling assumption:
Adopted the Woodland Code value £29.17 at 2023 prices for PCU, deflated to 2020 values of £25.97. We have added an adjustable premium factor into the PCU pricing to account for carbon traders' transaction costs and profit margins, when trading credits. The baseline adopts a 1.3 multiplier as baseline, representing the general trend in with carbon developers in the global market. PCU market prices have a premium to account for agency costs, trading transactions and marketing costs, the choice of premium is up to the user. The PIU prices are kept constant given the short period of time they are active in the model, the first 7 years.
In addition, a value has been developed on the basis of recent "Overcoming barriers to the engagement of supply-side actors in Scotland’s peatland natural capital markets" research for Scottish Government which provided an assumption of £30 (a 50% verification premium on top of an assumed PIU price of £20) +2% REAL annual growth (i.e. inflationary rate of 2.5% + assumption the carbon growth rate will be 2%) leading to a "nominal" growth rate of 4.5% p.a..
Note we have also included a "PCU price at farm gate" value of £23.34 into the model. This is nominally 80% of the "Market price PCU" value, reflecting that farmers will have to offer a discount to traders. PCUs at the farm gate are discounted PCU prices which account for traders' risks and marketing costs – the choice of discount is up to the user. The model uses 0.8 (20% reduction) as the baseline.
There are also "switches" in the model relating to the PIU price and PCU Market price – which can be used to test alternative options or values.
Sources / explanation:
- 2024 State of the Voluntary Carbon Market (SOVCM) – Ecosystem Marketplace
- https://www.iucn-uk-peatlandprogramme.org/peatland-code/uk-carbon-price-index
- Overcoming barriers to the engagement of supply-side actors in Scotland's peatland natural capital markets – Final Report – gov.scot (www.gov.scot)
20. Leakage of emissions (as phrased in the Peatland Code)-
Modelling assumption:
As per IUCN Emissions Calculator Version 2 March 2023. The baseline modelling assumption is no leakage. This is justified by the assumption that, due to the focus on inactive agricultural land as the key land classification for this initial package of restoration work, that displacement of activity will be minimal and therefore leakage will be zero.
Sources / explanation:
- Peatland Carbon Code Calculator (IUCN) Version 2 2023
- Peatland Code | IUCN UK Peatland Programme (iucn-uk-peatlandprogramme.org)
21. Ecosystem Services – Approach
Modelling assumption:
Different instruments all produce the same restoration and the same ecosystem services per hectare. We have monetised non-market benefits of peatland restoration, in line with ENCA guidance and the context for Scotland. Figures for the below co-benefits have been reviewed, revised (where appropriate) and the underlying rationale and assumptions provided.
We have modelled the lags uniformly for simplicity, increasing by 20% increments until 100% after 5 years. To note the lags we could find are as follows: Abatement Lag (chosen as this is the length of time between a project’s validation and verification process), Biodiversity (there doesn’t appear to be any references to lags in this across the biodiversity or non-use value “guidance on use in appraisal/accounting/projecting values” or “valuation metric/approaches” tables in ENCA) and Flooding Benefit (“Newly created woodland is considered not to provide a water regulation service within the first 10 years” is stated in ENCA – note that we are not exploring woodland creation, instead improving the condition of already-existing bogs).
Sources / explanation:
- Enabling a Natural Capital Approach (ENCA) – GOV.UK (www.gov.uk)
- RESAS engagement with DEFRA colleagues leading on ENCA
22. General Recreation Value per ha pa
Modelling assumption:
ENCA provides estimated values of £48 – £6510 / hectare / year for the value of a hectare of managed grass as part of a larger site. The low value is for a rural site and the higher value for an urban site. The average value for all sites is £544 / hectare / year. The rural value of £48 / hectare / year is the estimate included in the 2022 Green Book summary values table (Table 3, Annex 1) expressed in 2020/21 prices (£48) as the low end of the range. This demonstrates how varied recreational values can be.
Sources / explanation:
23. Hydropower Value
Modelling assumption:
Freshwater, wetlands and floodplains in Scotland generate 4,872 gigawatt hours of energy with a £72 million value pa (2022 prices). Total potential area in Scotland = 1,382,380ha. Therefore £52.08 potential generation per ha supply area. There is a low-level assumption (based on consultant experience) of a 20% increase in low flow periods from restored peatlands, then £10.42 per ha may be gained with peatland restoration.
Stable baseflows ensure a consistent supply of water to hydropower plants, enabling reliable electricity generation. Fluctuations in water levels can disrupt power production.
Sources / explanation:
24. Water per ha pa
Modelling assumption:
Public water supply is £1.45 per m3. As per ENCA (Fitch et al), 267m3 of water is stored on average per ha per annum by grass and shrubs. A high-level assumption of 20% water has been used (53m3) x £1.45 = £77.43 annual value per ha. This has been updated to 2020 values of £77.68.
Sources / explanation:
25. Biodiversity Benefits
Modelling assumption:
Two mutually exclusive options: We have included two different options for valuing biodiversity benefits, although only one of which should be used when modelling. The choice around biodiversity revolves around whether it is treated as a traded commodity (biodiversity credits) or whether it is treated as an ecosystem service (existence value). Only one of which should be used when modelling so as to avoid double counting, and the choice is then whether to treat this as part of the wider ecosystem services valuation or as a potential revenue-generator.
On existence value- ENCA has 2010 values of £304/ha for the marginal value of each additional hectare of good quality biodiversity habitat in inland wetlands. This has been updated to 2020 values of £373.93/ha/pa. On biodiversity credits – note that the voluntary biodiversity credit market is currently underdeveloped so it's difficult to assign a market value at present. There seems to be one large scale rewilding project occurring in Scotland that is seeking to sell biodiversity credits, on the isle of Taransay. The developer is hoping to sell his voluntary biodiversity credits for $30 (£23.63) each, again deflated to 2020 values of £21.03.
Sources / explanation:
- Existence Value: ENCA_Services_Databook_3.0_July_2023 Final .xlsm (live.com)
- Credits: OPIS Biodiversity Market Report dated 15/08/2024.
26. Flood Reduction Value ha pa
Modelling assumption:
Average of grass and shrub flood reduction values (interception and soil water storage) in Scotland is 267m3 per ha (Fitch et al 2020). Please note the caveat that peatland is assumed to fall into the grassland and shrub category here. Estimated average flood abatement value is calculated to be £0.47 per m3. Therefore 267 m3*£0.47 = £125.49 per ha pa value, adapted to £125.89 (2020 values).
Sources / explanation:
27. Water Quality Maintenance
Modelling assumption:
Restored peatlands will enhance baseflow and therefore have greater pollution dilution capabilities. Published value is £436 per ha per annum. A high-level assumption of 20% of published value has been applied due to upland areas having limited pollution but having high dilution capabilities, particularly in low flows. This £87.20 value has been inflated to £107.26 (2020 values).
Sources / explanation:
28. Sheep Production Value per ha pa
Modelling assumption:
We have arrived at a value of £18 per hectare per annum. This is derived from a James Hutton Institute literature review, which stated running costs of £43/ha, and revenue of £61/ha, suggesting a profit value of £18/ha in 2020 values.
Sources / explanation:
- (Internally Sourced) James Hutton Institute's Scottish peat values and ecosystem services: Evidence Map of literature
29. Stalking Revenue
Modelling assumption:
We have arrived at a value of £193 per hectare for stalking revenue, based on the gross margin for 100 hinds is £19,251, at 1 hind per ha, therefore £193 per ha. This has been inflated to 2020 values of £215.45.
Sources / explanation:
30. Grouse Hunting Revenue ha pa
Modelling assumption:
Estimated to be £20 per ha. This is the lower estimate (£20 to £100 per ha) of a study (Moran et al 2013) found within the IUCN's "Assessing the opportunity costs associated with peatland restoration" report.
Sources / explanation:
31. Land Value
Modelling assumption:
The Scottish Land Commission's 2023 Rural Land Market Report suggests that the average price per hectare of farm land in the Highlands and Islands region in 2022 was £7,733 (selected as majority of peat land restored will likely be in this region, and is the most conservative regional estimate). This value has been deflated to £7,478.59 to reflect 2020 values. This should be caveated, however, as this may seem particularly high though considering the focus on non-productive agricultural land.
Sources / explanation:
32. Securitisation Costs
Modelling assumption:
In the five years prior to M&E/Maintenance costs considered at Assumption 10, we have developed a separate "securitisation" cost of £188 to account for the added level of resources required to secure the land. Assume £6m grows to £6.6m annual cost (over 5 years), and secures 35K ha per year for restoration, as per current forecast. This will imply a £188 per ha securitisation cost over the first 5 years.
To update this in the model to reflect difference in hectarages selected you would need to divide the £6.6m to whichever annual target hectarage is selected.
Sources / explanation:
- From discussions with SG policy colleagues
33. Subsidy Value per ha pa
Modelling assumption:
While not factored into the analysis sheets (based on the assumption of modelling inactive agricultural land), a subsidy value was included (within our land value inputs) per ha pa of £14 in our inputs for the model, for future consideration to be "switched on" when relevant.
Sources / explanation:
- RESAS, Region 3 - Combined Basic Payment Scheme (BPS) and Greening payment rates for farmers and crofters, 2024
- Payment rates set for Basic Payment Scheme and Greening 2025
34. Interest Rate
Modelling assumption:
The model factors in a 2.5% interest rate, in line with Green Book guidance. The supplementary guidance states that the Office of Budget Responsibility provides long-run forecasts of GDP growth of 2.2% per year in real terms, and therefore for the project to return a (negligible) favourable return the interest rate has been increased to 2.5%.
Sources / explanation:
- Green Book supplementary guidance Annex 6: Discounting