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Publication - Research and analysis

Mobilising private investment in natural capital: report

Published
27 April 2023
From
Cabinet Secretary for Rural Affairs, Land Reform and Islands
Directorate
Agriculture and Rural Economy Directorate, +2 more … Environment and Forestry Directorate, International Trade and Investment Directorate
Topic
Economy, Environment and climate change, Farming and rural, +1 more … Money and tax
ISBN
9781805255673

This report looks at how to encourage responsible private investment into peatland restoration, including how to overcome barriers to scaling voluntary carbon markets to restore peatland in Scotland.

View supporting documents Supporting documents

Annex D: Mechanisms for improving financial governance

Finance Earth assessed options for a range of mechanisms to support market development and good financial governance. Each of these mechanisms represents a broad approach and several could be delivered in combination or as a hybrid.

Mechanism

High-level Considerations

Scotland Carbon Fund
  • As an investor, the SCF is able to directly structure financial governance mechanisms into investee projects (e.g. endowments, long term financial planning, sales strategies for carbon credits).
  • Acting as a cornerstone investor in the Scotland Carbon Fund, the Scottish Government is well placed to set the market standard for governance for wider projects / investors.

Price Floor Guarantee
  • Market pricing risk is transferred away from projects but not the risk of delivery. This helps investors get comfortable with the market as it matures.
  • The price floor gives confidence to project developers / investors over medium/long term revenues, in turn providing greater medium/long term certainty for the project.

Operating Payments
  • Providing a mix of capital and grant, or full grant funding would reduce delivery risk to Scottish Government while creating a role for private investment.
  • In particular operating payments (e.g., for 10 years) will build sector credibility, while granting confidence of a minimum level of permanence to carbon buyers.
  • As the market matures maintenance grants could be reduced or made conditional on target outcomes.
  • This mechanism is a key enabling factor for other approaches including the SCF and PFG.

Dis-incentivise Upfront PIU Sales
  • Restricting PIU sales may improve long term outcomes by forcing a portion of revenues into the operating life of the project.
  • This and other regulating mechanisms could be aligned to schemes that incentivise holding PIUs including the PFG.

Endowments
  • Projects could be required / incentivised to capitalise an endowment to fund (a percentage of) long term maintenance costs.
  • This will build a greater understanding of long-term costs but may reduce delivery until carbon pricing climbs further if requirements are too punitive.
  • Endowments could be designed directly into the Scotland Carbon Fund investment model.

Regulatory Pressure
  • The prospect of the introduction of carbon disclosures and pricing for peatland emissions (in 2030 or later), could be used to convince landowners to take action and restore peatland now, to avoid predatory delay.
  • Public policy measures such as carbon price could also be used to resolve discrepancies in land pricings that currently cause degraded peatland to be worth more than healthy peatland.

Contact

Email: peter.phillips@gov.scot

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