Introduction to Nature Markets

Smaller farms may join aggregated groups of farmers, such as farmer clusters or cooperatives. Costs can therefore be shared across many farms, making it financially viable for smaller scale farmers. Knowledgeable individuals within the aggregated group can negotiate on behalf of all members to achieve the best results for members.

Land can also be aggregated via technology, and there are certain 3^rd party project developers that offer smaller-scale farms the chance to join nature markets along with other farmers through the use of a common technology platform.

You can learn more about this approach in Milestone 2 (Working with Other Farmers).

Nature market trades may require a long-term commitment to a change in land use. There will be restrictions in place to ensure these changes will lead to a degree of permanence for the buyer of ecosystem services.

For example, Biodiversity Net Gain requires a change in land use to be agreed for at least 30 years, which will also likely be legally enforced with Conservation Covenants.

Farmers are concerned with longer term agreements with restrictions on land use, as this presents a loss of control of the land.

Commitments and restrictions must be clearly understood before entering into nature markets, including scrutiny of the legal agreements. You should also ask what will happen to the land at the end of the contract period.

There are nature market options with shorter term commitments, such as water quality and soil carbon schemes of between 1-10 years.

Farmers should create partial budgets / cash flows to understand if the income from a nature market trade is sufficient to cover any loss of traditional income and capital value from that land. Advice should also be sought on the tax and land value implications.

You can read more about this in Milestone 5 (Farm Business Planning).

One perception is that committing land to nature market projects may involve ceasing some food production.

For example, in restoring a peatland that was previously used for arable production.

Although some projects will take land out of production, farmers can identify non- or low-productive land, to help minimise the trade-off between nature and food production.

On the same piece of land, there can also be opportunities to combine food production with nature market opportunities. For example, the Peatland Code permits low intensity grazing on restored habitats.

It is currently unclear how most public grant schemes, such as the Environmental Land Management Schemes (ELMS), can be ‘blended’ with nature market trades.

This can dissuade farmers from committing to nature market agreements now, in case these trades disqualify them from future agri-environment schemes.

The government is expected to provide further clarity on blending public and private finance, which it recognizes can help to utilize private finance and make environmental improvement projects more cost-effective.

In some cases, the rules for blending public and private finance for the same environmental improvement have been clarified. For example, farmers can receive grants from the England Woodland Creation Offer (EWCO) and also receive payments for carbon sequestered by registering with the Woodland Carbon Code.

Defra has also confirmed that Sustainable Farming Incentive (SFI) applicants may enter the same area of land into an SFI standards agreement and a nature market agreement, subject to any eligibility rules or additionality tests applied by the agreement in question.

However, farmers should familiarise themselves with the rules from any and all funding sources – including government grants as well as any Codes, Standards or private schemes being used.

More information can be found in the Public Sector Funding and Policy section of the Toolkit.

Legal agreements underpin nature market projects, the detail of which could oblige farmers to cover any costs of non-delivery of agreed outcomes. This can include force majeure, such as natural disasters.

They may also be liable for costs that are not considered at the time, such as maintenance and monitoring costs.

Any legal agreement signed should be scrutinized closely to understand farmers’ liabilities.

Farmers can speak with their peers, such as other farmers in the country that have signed up to similar agreements, to understand the exact terms on this subject. They can also seek independent legal advice.

More information can be found on this in Milestone 8 (Signing Legal Contracts).

Engaging with nature markets sometimes comes with upfront costs that are placed on farmers.

These include costs associated with baselining, joining up with other farmers, advisory services and legal fees, in addition to the costs of physically implementing changes on their lands.

Even if these costs are eventually paid for with the income from nature market trades, the need for funding to cover development activities can act as a barrier.

In some cases, farmers can combine nature market trades with public or philanthropic grants to meet up-front costs specifically. Examples include the England Woodland Creation Offer and the Landscape Recovery scheme – which can both be used for planning and development costs.

Another example is the Natural Environment Investment Readiness Fund (Round 3), which is a development fund that is directed at farmers and can help with the costs of setting up and exploring nature market projects.

More information on sources of development funding can be found in the Public Sector Funding and Policy section of the Toolkit.

In any case, financial planning is recommended to ensure all costs are met. You can read more about this in Milestone 5 (Farm Business Planning).

At the moment, tenants face additional barriers in nature markets, as there are implications for changing land use in both tenancy agreements and laws that protect tenant farmers.

It is also currently unclear who owns the natural capital / ecosystem service uplift and how the income from nature market trades are split between landlord and tenants.

Farmers should check their existing tenancy agreements, before having a conversation with their landlords to explore opportunities.

Prior research into opportunities is recommended. Tenant farmers can present a plan to their landlords that demonstrates the potential mutual benefits, as with traditional agricultural agreements.

Advisors and land agents can also act as an intermediary and help demonstrate these mutual benefits.

You can read more about this in the Tenancy and Ownership section of the Toolkit.

Nature markets are nascent but some are predicting increases in demand (and therefore price) for things like biodiversity (BNG) units, carbon credits and natural flood management payments.

Farmers may speculate that prices will increase in the future, which can dissuade them from committing to any trades today.

Farmers can start preparing now without committing to any nature market trades. This preparation will likely put farmers at an advantage for when they feel that prices are at the right level for them.

This preparation is mainly characterized by Milestones 1, 2 and 3 of the Toolkit – what is termed the Groundwork of engaging in nature markets. Through these Milestones, you can get a strong sense of what natural capital you have on your land, what environmental improvements you’d like to see, and how potential nature market deals can be used to deliver these environmental improvements for fair reward.

In some cases, farmers may want to go a step further and create these habitats in advance of any agreements or sales, as this can ensure that a steady supply is ready for higher levels of demand. An example of this is with woodlands and peatlands, where farmers can sell carbon credits upfront, but these credits become much more valuable when the habitats are established and the carbon benefits have been realized.

It's important to note that this decision depends on the risk appetite of each farmer and also what funds are available to cover upfront costs. It’s also vital that farmers register the habitat and their intention to sell with the relevant Code, Standard or Authority, as otherwise any uplift cannot be counted in a nature market agreement.

If farmers are interested in selling now, another option is to work with an intermediary – such as a broker - that is willing to speculate on price with a secondary sale to the final buyer. In some cases, farmers can negotiate a ‘revenue-sharing arrangement’ that allows them a share in any uplift in market price from this secondary sale.

For example, a farmer selling biodiversity (BNG) units to a habitat bank could receive an up-front payment, followed by a percentage share in any uplift from the habitat bank selling the units in five years. Not all intermediaries offer this, but it is worth the farmer enquiring or negotiating.

There is a risk that farmers may sell ecosystem services now but require these for their own reporting with other stakeholders, such as agricultural buyers and the government at a later date. In the future, reporting on these ecosystem services may be a cost of business, rather than a separate enterprise that farmers are paid for directly.

For example, some supermarkets are asking its farmers to sign up to sustainability commitments, such as carbon neutrality, where this would limit the amount of carbon a farmer can sell to another organisation.

Farmers can engage with their agricultural buyers now to get a sense of future expectations and requirements. This approach is covered more in Milestone 4 (Work with Buyers).

In nature market agreements, they may also enquire about the option to buy back any ecosystem services sold (at the same price) in case they need these to meet their own reporting requirements.

If a farmer’s natural capital is already in good condition on land they are willing to use in a project, then there may not be enough of an ‘uplift’ to generate additional ecosystem services.

Some may also ask if it is worth intentionally degrading the land beforehand so that there will be a bigger uplift to monetise. This is called perverse incentive, and many Codes and Standards have processes in place to prevent this – such as looking at data on yearly land use.

As the concept of additionality is fundamental in nature markets, it may not be possible to sell ecosystem services from healthy natural capital.

However, farmers are often surprised when more detailed environmental data is taken and assessed, as their land may have unexpected room for this uplift.

To be sure, it is recommended that you Assess your Land Opportunities (Milestone 1).

Farmers and other participants in nature markets currently face uncertainties on how a nature market project will affect their wide tax position. For example, how receipts of payments will be treated vis-à-vis income tax and VAT relief. In particular, farmers are concerned that committing part of their land to a nature market project will lead to the loss of Agricultural Property Relief (APR) or Business Property Relief (BPR) in regards to inheritance tax.

Profits and longer-term financial gains can therefore be significantly reduced if tax treatments are applied unexpectedly.

The Government has recognised that tax uncertainties present a major barrier to farmers considering their nature market opportunities. In March 2023, HMRC and HM Treasury launched a consultation on ‘Taxation of environmental land management and ecosystem service markets’.

As of January 2024, no announcements or results of the consultation have been announced, but these are expected later this year. You can read the full brief of the consultation, which lasted for three months, here.

Many have also noted that, around the time that this consultation was announced,  HMRC confirmed that land used in Peatland and Woodland Carbon Code schemes is capable of qualifying for Business Property Relief. Some have taken this as a sign that the government intends to reform tax laws to be more favourable towards nature markets.