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Sam Hall: We must leverage private finance to spur the agricultural transition

Sam Hall (Director at CEN)

Defra's groundbreaking reforms to English farm payments are coming under increasing pressure. A coalition of politicians seeking to court rural voters, farming groups hoping to retain old-fashioned subsidies for land tenure, and environmental policy sceptics are pushing to delay the agricultural transition.

In a recent blog, Defra confirmed it is holding firm on its plan to phase out the system of payments for owning farmland over seven years while phasing in a system of payments for delivering environmental benefits (i.e. the Environmental Land Management Schemes, or ELMS). But there is undoubtedly a risk the consensus frays and the ambition of the transition is diluted.

I note, as an aside, that the arguments of those wanting to delay the transition do not always appear consistent with other positions they hold. For instance, if you also campaign to improve water quality, it would be counterproductive to delay ELMS, which will incentivise land management practices that reduce soil erosion and chemical run-off from farmland, which are the leading cause of river pollution. And if you want to grow more homegrown food, it doesn't make sense to also call for more biofuel mandates and energy crop subsidies, which take land out of food production.

In a previous blog, I set out the case for ELMS and why this is in the long-term interests of farmers, the environment, and taxpayers. While the Russian invasion of Ukraine has changed the context and brought food security to the forefront of the policy debate, the fundamental arguments for the transition remain strong.

First of all, delaying the transition would not get extra money to the sectors most affected by surging grain prices. As the Environment Secretary has compellingly argued, intensive pig and poultry farmers, which rely on globally traded grain, are not large recipients of direct payments because they do not have a large land footprint.

Second, the intensification of farming, which direct payments encourage, is not a sustainable approach to securing food supplies. After the Second World War, the existential threat of food insecurity saw the government subsidise the removal of hedges, trees, and wetlands in the farmed landscape, to get every possible acre of land into production. Shortly afterwards came the advent of agrochemicals. The consequences have been dire for nature, but it is also a very short-termist approach to food security since it depletes the enablers of food production: fertile soils, clean water, a stable climate, natural pest management systems, and pollinator populations. We must not double down on intensification.

Conservatives believe in long-termism and our responsibility to future generations. So we must find a better way to boost food security. A delay to ELMS would slow the transition towards regenerative, lower-input farming practices, which have the potential to make the sector more resilient to future global commodity price shocks and reduce reliance on imported inputs, such as fertiliser and animal feed.

In truth, the challenge we face is not a surfeit of funding to support the shift towards regenerative farming practices and provision of ecosystem services by farmers but a deficit. A recent Green Finance Institute report found that we need £56 billion of investment over the next decade to meet our biodiversity goals in the UK.

But public funds are limited, given the many other spending pressures on the Treasury and the political imperative to cut taxes. So if we want to unlock more money for British farming and meet the urgency and scale of the interrelated environmental threats, the government must move forward with plans to establish and grow private markets for environmental land management.

Defra has for a while accepted the principle that ELMS should leverage private funding for environmental services, and the Treasury has set a target for Defra to mobilise £1 billion in private nature-based investment by 2030. But there isn't yet much detail on how this could work. Defra has some good examples to work from, such as the Woodland Carbon Code, which attracts private funding into woodland creation as a way to offset corporate carbon emissions. There are also examples from abroad, such as the US market for water quality credits, driven partly by the Clean Water Act.

This isn't just about meeting nature goals, however. Farm profitability is a growing concern. Rising input costs are putting increasing pressure on farmers' finances. In that context, private environmental services markets could provide additional revenue for farmers. There is potentially a much bigger and more reliable pot of money from the private sector that doesn't rely on the government of the day's fiscal policy or the ranking of the environment among its priorities for spending. In short, these markets could be a driver of rural levelling up by channelling more investment into the countryside.

But to unleash the potential of private finance for environmental services, Defra needs to create a regulatory framework so that farmers, private beneficiaries, and investors have the confidence to participate in this market. I believe five key policies are needed to get businesses risking their capital. These reflect some of the recommendations of the Financing Nature Recovery coalition, which published a report earlier this week.

First, we need to create and strengthen the demand among private sector beneficiaries for carbon, biodiversity, and water quality credits. There is no point in farmers generating credits on their land if there are only a handful of potential buyers. Some beneficiaries will buy credits voluntarily because they see some benefit to their business, but many will only do so if credits can be used to meet legal commitments.

Demand creation measures could include: expanding the sectoral scope of the UK Emissions Trading Scheme to include forestry, peatland restoration and other permanent forms of farmland carbon capture; mandating natural capital accounting for public listed companies and encouraging them to set nature positive targets; removing the remaining exemptions from biodiversity net gain; setting a new water quality target for overall river health post-2027; and giving clear guidance to Ofwat to allow more natural environment investment by water companies.

Second, we need to design a comprehensive set of high integrity environmental standards for accrediting these projects. Standards should assure beneficiaries and investors that credits will deliver additional environmental benefits above business as usual on a permanent basis. For schemes delivering multiple benefits where payments for environmental services are being stacked, the standards should also set out how costs should be allocated to different beneficiaries.

This is important because there are environmental risks if the standards aren't robust enough. Offsets shouldn't be used as a screen for unnecessary carbon emissions or biodiversity loss - reducing environmental damage at source should be the priority, and this needs to be built into the standards.

Similarly, standards targeted at one outcome, such as carbon, should have minimum biodiversity requirements too. This will ensure ecological coherence and prevent these schemes from incentivising fast-growing monoculture woodlands, for example, which are bad for biodiversity but good for carbon.

Third, a slice of the ELMS budget should be ringfenced for blended funding projects. Each region should have blending pots with a local nature recovery strategy. Landscape Recovery, in particular, has the potential to leverage significant private funding, and Defra should continue to prioritise this scheme as part of the ELMS rollout. Blending should happen in the Local Nature Recovery scheme too. The result is that Defra shouldn't crowd out private markets by funding environmental services through ELMS that private beneficiaries would otherwise fund.

To reiterate, there will remain a need for public funding, particularly at the start while these markets establish themselves. Specifically, ELMS funding is needed to create demand from land managers and derisk early projects for the private sector, funding for regulators is needed to establish the market standards and enforcement functions, and the first demonstration projects need to be given support to develop investable business plans.

Fourth, there needs to be some market oversight body - ideally by giving an existing body additional resources rather than creating a new quango. For investor certainty, it's important that this authority that sets the standards is distinct from the agencies doing the accreditation of individual projects. Its remit should include approving standards, accrediting brokers and marketplaces that can access this public funding and put together consortia of interested private sector partners, and auditing the monitoring and verification of projects.

Finally, there should be a series of regional and national reverse auctions for nature restoration projects, where farmers and land managers can bid to deliver blended funded projects that provide multiple environmental benefits. The lowest bids will be given contracts and competition will drive down costs for the taxpayer, as we've seen happen with offshore wind.

This policy agenda should be especially attractive to a Conservative government looking to craft a distinctly conservative approach to the environment, which makes the most of private capital and market forces, and puts more of the responsibility for protecting and enhancing our environment on to the private sector.

While this will bolster our long-term food security by allowing for the recovery of natural capital, it won't solve the whole food security challenge. To do that, the government will need to create new incentives and reform regulations to encourage the uptake of new environmentally-friendly food technologies, from vertical farming and gene editing to precision fermentation and cellular meat. Less high-tech options, such as planting more fruit and nut trees or building more Dutch-style glasshouses, should also get government support. Finally, penalising food waste and weakening incentives to give land over to bioenergy crops would also help.

It's very encouraging that the government remains committed to environmental land management and to leveraging private funding. Ministers deserve huge credit for resisting short-termist and politically opportunistic calls to abandon the reforms. Currently, however, it is missing the opportunity to drive more money into farming, accelerate progress towards its nature goals, and get better value for taxpayers' money.

The Dasgupta review, which was commissioned by Treasury ministers and published last year, provided finance ministries and investors across the world with a blueprint for valuing natural capital. The UK now has the chance to go one step further and provide a model for environmental markets to complement our pioneering reforms to farm payments.

Now is the time to set out how private finance can support the agricultural transition here in England. The political will is there and the Financing Nature Recovery coalition has provided the blueprint. Certainty about extra funding for farmers might even reduce the political pressure to delay the transition.


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