WHY NATURAL CAPITAL IS SO IMPORTANT FOR AGRICULTURE

As the dust settles on the COP26 summit in Glasgow, and the world leaders all return home on their private jets, the headlines have largely moved on; you might be hard-pushed to know that the world talked of little else for a fortnight last month.

But just because the subject has been usurped on the front pages does not mean it has gone away, and there are some significant repercussions for agriculture – including a big area of opportunity.

The target of Net Zero by 2050 contained in the Climate Change Act could be a game-changer for farming, because it puts a real value on what is increasingly coming to be called ‘Natural Capital’. 

Natural Capital refers to those elements of the natural environment which provide value to humanity.  We are well used to one side of this: the value our land can offer through provision, whether of food, water, fuel, timber or any other commodity which can be sold.

But the flip side of Natural Capital – regulation – is becoming ever-more important.  This refers to the regulatory benefits the land can provide, such as carbon storage, flood prevention, air quality or climate regulation.  Up until now it has been difficult to put a financial value on these unarguably positive things, but the increased focus on Net Zero means that concepts such as carbon credits will provide a real, tangible return on the regulatory side of Natural Capital.

We are already familiar with the way that Pillar One subsidies for food production are being replaced with government payments for environmental land management; Natural Capital will give farmers an additional, tradeable income stream from their land.

So should the sector be jumping straight into this brave new world of carbon trading, seeking immediate returns on this new form of capital?  My advice would be to hold back for a bit while the market establishes itself, or else farmers will risk selling themselves short.  As pressure builds for progress towards Net Zero in the coming years, it’s likely that the value of carbon credits will rise.

There is sure to be an impact on land values as the market develops and this new income stream starts flowing.  We are already seeing some landlords trying to insert clauses in tenancy agreements which reserve the Natural Capital for themselves, much as they might sporting rights.  Does this new income stream not sit alongside the productive capacity of the farm and something that is developed by the tenant to support the rent?

It is, surely, a reflection of the potential value of this new form of asset.  We are even seeing some local authorities considering taking land back in hand so that they can benefit from the carbon credits to offset against development.

Natural Capital may also see lower quality agricultural land rising in value.  If you are going to re-wild a parcel of land, it’s unlikely you would use your most fertile and productive plots.  Those marginal acres could see much improved returns as the carbon market grows.

There is another side to the Net Zero coin, of course: it will impact on farm operations, from cultivation methods, energy use and especially the livestock sector (the meat industry is already facing growing activist pressure).

But despite this, the emergence of the concept of Natural Capital is an opportunity for creating a new income stream for agriculture.  We just need to be patient to ensure we can maximise that opportunity as the market develops.