Farmers will gain new opportunities from carbon offsetting, which will change how land is used and valued
Investors are increasingly familiar with the concept of stranded assets: previously investible assets that a changing framework makes obsolete, such as coal-fired power stations or North Sea gas platforms. The concept was driven originally by climate activists seeking to influence business behaviour, but 2019 will be marked as the year when the regulatory leverage needed to force a change in corporate investment approach became real in the UK.
The government’s 2019 commitment for the UK to achieve net zero carbon emissions by 2050 will have profound effects across all sectors of the economy. Most climate-related corporate change so far has focused on companies promoting that they are carbon neutral: taking current carbon emissions and offsetting them, largely through the purchase of cheap carbon credits overseas. The government’s new ‘net zero’ policy presents a totally different ballgame, requiring a fundamental rethink of how we live, travel, shop and eat. The emphasis is on bringing carbon emissions as close to zero as possible, using carbon offsets for the residual amount only.
Agriculture itself is responsible for 9% of UK-produced greenhouse gas emissions. It could be argued that the utilisation of solar energy to fuel the capture of atmospheric carbon dioxide into human-edible carbohydrates, and subsequent conversion into human-edible proteins, fundamentally is a biological process inseparable from human existence. However, human ingenuity has enabled us to supercharge this natural process with some basic innovations such as inorganic nitrogen and plant medicines, which have both positive and negative consequences for society. Positive in the sense of cheap, abundant and safe food for consumers; negative in the sense of the exclusion of biodiversity from food production, leakage of these manufactured stimulants into the natural environment, and over-reliance on climate-damaging fossil fuels to generate yields.
The Committee on Climate Change has recommended a wholesale shift in how land is used in the UK to address the climate impact of farming. A raft of economic and market incentives are proposed to influence the behaviour of farmers, rather than any regulatory conditionality on land use. The introduction of private market competition for the services that land can provide challenges the economic status quo. Supermarkets, held to account by investors and carbon disclosure requirements, must shift to net-zero-carbon purchasing much more quickly than farmers are required to through agricultural policy incentives. Navigating the pace of change from buyers will disrupt many farmers who are not willing to adapt.
But in the same way that a garage forecourt can be repurposed as an EV recharging station, farmland is very far from being constrained by its food-producing paradigm. If we view its basic function as carbon capture, storage and recycling, land offers services way beyond creating nutritional energy alone. And those services may well be increasingly valuable as the market pricing of residual carbon finds an equilibrium around the relative costs
of emissions avoidance and the ability of technological innovation to meet the target of net zero.
The unsaid challenge for society is that these demands may result in the fundamental process of food generation from UK land becoming an uneconomic option. This is all very well in the age of abundant calories and wealthy free-market consumerism in a relatively benign global climate, but it has potentially devastating effects as climate change places additional stress on already vastly depleted global water supplies and food-insecure people start to move. Technology may not save us from the impacts of climate change in time, or at all.
Taking account of all the different environmental services that UK land delivers to society, including carbon storage, water filtration and food, the Office for National Statistics has determined that the total value of our natural capital is more than £950bn. This figure rather overshadows the standard Red Book valuation of UK land as approaching £250bn. So how does the natural capital valuation transmute from being an assumed figure to becoming an actual figure on the balance sheets of UK farmers? Particularly when meeting climate targets set by supply chains and regulators could pose a big liability.
One could argue that it will happen quite quickly. Valuations take account of earning potential as well as market desirability. Even if food production is marginal in many areas, land is the only asset class that can provide a private market offsetting service to meet the new regulatory pressures that the rest of the economy faces. As regulations on ‘net zero’ resonate through the economy, demand from private offsetting could help drive the government’s aspirational targets for tree planting: 30,000 hectares a year sounds substantial, and although it is hard to think of any UK farming landscape that could not accommodate more trees, many barriers inhibit these targets.
Not least among the challenges is the valuation convention that conversion from agricultural to timber production reduces land values. However, Savills predicts an attractive 6.2% increase in forestry land values over the next five years, suggesting that commercial forestry at some point during the timber cycle recovers its value and then, assuming capital values continue to rise, could outperform its farmland cousins. But if capital value is vanity, then income is sanity: figuring out how the tree functions as
a carbon store and as a source of timber, biodiversity, food and fodder is the key to securing its inclusion in a farmed environment.
Capital values necessarily reflect income returns, and the critical point is that farmers should not price the competing services they can provide to society based on a comparison to income foregone from agricultural activity. Farming has been subsidised for two generations by European taxpayers, and so can hardly be described as a fair market comparison. Natural capital approaches layer the services that land provides and this can supercharge its earning potential. Carbon offsetters should pay for carbon storage what it is worth to them and their regulatory reputation, but food supply chains need to recognise that they’ve got competition for the farmer’s attention.
Ultimately, climate targets change the purpose of land occupation, and smart farming will adapt to accept the new paradigm. Making a living from the land is not the same thing as making a living from producing food. Within the context of entrenched private property rights, climate objectives serve to work more as an opportunity than as a liability, and land values will continue to reflect those rights and opportunities. The question of the balance of rights and responsibilities remains the long-term unknown. It’s a brave new world for farmers, and time for the ambitious to start working out what the marketplace wants.
