The potential for land in Scotland to create income through carbon sequestration has been becoming clearer over the last few years. Where the same party owns and occupies the land, taking a project forward is relatively simple; however where land is tenanted, questions arise – who can do what, and when?
The Tenant Farming Commissioner (TFC) has published an interim guide to securing tradeable carbon credits in an agricultural holdings situation, aiming to explain the principles of carbon trading and how schemes generating carbon credits might be accessed by landlords and tenants of agricultural holdings.
Carbon Credits and the Codes
The principle behind carbon credits (more properly carbon units) and the carbon markets is that for each tonne of CO2 equivalent (CO2e) sequestered by a project, a carbon unit is generated. That unit can be sold to third parties who are looking to offset their own emissions.
There are currently two Codes that provide validation and quality assurance standards for generating carbon units in the UK, the Woodland Carbon Code and the Peatland Code. Projects to be validated under the Codes must meet various eligibility requirements, an important one of which is the principle of additionality. Additionality requires the project to remove carbon that would not otherwise be being removed from the environment – a project that was to be undertaken anyway, either voluntarily or through some legal requirement, will not qualify to generate carbon units under the Codes.
The agricultural tenant's perspective
Land let under an agricultural tenancy must be used for agriculture, subject to permitted diversification rights. The first hurdle for an agricultural tenant is therefore whether what they want to do is permitted in terms of their lease.
The TFC notes that the definition of agriculture includes "the use of land for woodlands where that use is ancillary to the farming of the land for other agricultural purposes" and suggests that this means tenants could create small farm woodlands and shelterbelts unilaterally. Larger woodland creation would be a diversification, requiring landlord's consent.
Peatland restoration does not fall into the definition of agriculture but the TFC's view is that it may fall into the category of "conservation" activities considered to be within the rules of good husbandry and therefore may be able to be taken forward without requiring consent from the landlord, in terms of agricultural holdings legislation. Peatland undergoing restoration can also often still be lightly grazed, therefore continuing agricultural use which weighs against such projects being considered a diversification. However it is not a given that all projects will fall within the definition of conservation – individual facts and circumstances are likely to have to be considered.
However, both the Woodland Carbon Code and Peatland Code require landowner's consent where projects are being undertaken on tenanted land. The Codes require minimum commitment terms and so can only be undertaken if the landowner is prepared to step in and take on the project if the lease ends.
There may well be grant funding available for woodland and peatland sequestration projects that could make these attractive for tenants notwithstanding inability to generate carbon units.
The agricultural landlord's perspective
If a landlord wanted to undertake a project on tenanted land, a resumption from the tenancy would be required. The TFC notes that for a 1991 Act tenancy, this would require a contractual right in the lease, and be subject to the usual fraud on the lease rules. For fixed term tenancies, resumption under s.17 of the 2003 Act requires a grant of planning consent and 12 months' notice. The Guide suggests that most peatland restoration and woodland planting schemes are unlikely to require planning permission and therefore this is unlikely to be a viable route for the landlord.
Conclusion – parties should work together
The TFC suggests that – as with so many other aspects of agricultural holdings – co-operation is key to securing a mutually beneficial result. There is potentially money to be made from carbon sequestration in the right circumstances, and if landlords and tenants can work together, it should be possible to reach an agreement enabling projects to be taken forward. The challenge, of course, will be in the detail of those agreements and how they will interact with requirements of the legislation and the Codes, as well as what impact carbon sequestration schemes may have on waygoing claims.
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