Milestone 01


Poole Harbour Nutrient Management Scheme


Initial Project Scoping


Project Overview

The Poole Harbour Nutrient Management Scheme (the Scheme) aims to reduce nitrogen pollution from agricultural activity across the Poole Harbour catchment, delivered through measures such as planting cover crops and improved nitrogen efficiencies. The Scheme requires farms to work to the glide-path nitrate reduction targets set by the Environment Agency (EA) and allows those farms to trade nitrate ‘credits’ between themselves and any excess credits to other sectors, including water companies and developers. It is a voluntary and farmer-led collective with backing from the National Farmers Union (NFU), Natural England, the Environment Agency, Wessex Water, Triodos Bank and others. In December 2021, it established a Community Interest Company to host the Scheme’s operations. In Summer 2022, it began its second pilot with c.70 farmers to test the Scheme’s tools and processes.

 

 

Milestone 1: Initial Project Scoping

The initial task is often to understand the site(s) you want to use and the land use change needed for nature restoration or creation. This includes considering the goals of the land managers involved, the vision within the wider catchment or neighbouring area, and whether there are permits or planning consent needed for any proposed changes.

At this stage, you can also conduct a high-level assessment to determine which revenue streams can be generated from ecosystem services,  i.e. carbon credits, flood reduction cost savings, biodiversity units, which will be crucial for identifying buyer interest.

Finally, it is useful to have an idea of the costs of the project and potential grant funding that may be available to support initial development.

Introduction

Initial ownership of the ecosystem services will belong to the landowners or, in some cases, the tenants of the sites that the project is using. However, these can be passed onto others, such as third-party project developers, with lease arrangements. In some cases, there may be a sole seller of ecosystem services. This would be the case with a site or landholding large enough that it delivers the volume of ecosystem services needed to cover the costs of the project.

However, in order to achieve scale and impact, a project will likely involve multiple sellers, such as neighbouring land managers and landowners. Scale of land is often needed to deliver significant environmental outcomes, and also to attract private finance. Project developers must plan how they initially contact and engage with these sellers going forward.

Introduction

At this point, you will have understood the vision for the project and you’ll have chosen a particular ecosystem service or set of services to be sold. The next step will be to carry out detailed analysis – baselining each ecosystem service and quantifying what will be able to be delivered from the interventions, as well as planning how to monitor and maintain these interventions. You will need to rely heavily on ecological expertise for this more scientific milestone.

At this step, standards, verification and accreditation methods will be considered in more depth.

Introduction

Based on your earlier market analysis in initial project scoping, you will have identified one or more groups of beneficiaries who may be willing to ‘buy’ or pay for the ecosystem service(s) to be created, restored or maintained. Buyers vary – as do their requirements – but At this step, greater buyer engagement is now needed to develop a deal that channels financing.

 

 

Introduction

You’ll have started building your business case and financial model in earlier steps – laying out your vision, the market proposition and estimating costs and income. This step offers a review, in addition to providing details on information needed to build out the financial model and business case more fully. Both of these key documents will be iterated throughout project development, and may be altered during project delivery as new information emerges. These documents are interlinked and, if developed correctly, will ensure your project’s viability and also help you with discussions with stakeholders including sellers, buyers and future investors.

The financial model will also enable you to better understand the type of structure your project may take to attract investment (i.e., an environmental bond, a loan, an equity investment) and what sort of returns you can afford to pay/offer.

Introduction

A governance structure will inform the way in which the project is run when fully operational and for what purpose. It identifies appropriate decision making processes, who is responsible for what actions, and what controls are in place to make sure that the project is meeting its stated goals, all while abiding by the risk appetite of its engaged stakeholders. The legal entity to host the project will be a key driver in this, and the appropriate choice of entity will be dependent on several factors that are outlined below.

Your governance structure should align with and underpin your business case, as a necessary component of how the project will deliver its environmental outcomes and other strategic targets.

Introduction

It is important to note that not all projects will need up-front investment, but for those that do, this section provides a framework for thinking around the development of the investment model. This does not constitute financial advice – as the GFI is not licensed to do so. However these considerations are based on the insight offered by project developers and other market stakeholders.

An investor will be a new core stakeholder in your project, and it’s just as important to think of what you require from investors, as much as what they require from you – so that you can build a positive and collaborative relationship with them.

This entails defining the investment ask (in line with the financial model), the strategy for approaching the right investors, and the negotiation of terms that can then be formalised in contract development (Milestone 8).

 

Introduction

When all relevant stakeholders have been engaged and their terms of engagement are clarified as much as possible, this is the time to develop the legal contracts and close the deal. This stage is last because legal fees are expensive, and it is generally advised to determine as much as possible in previous stages before

Note: The information in this Milestone does not constitute any form of legal advice but instead serves as practical advice on how to manage engagement with lawyers and the process of contract development.

The Green Finance Institute is not a firm of solicitors or connected in any way with the courts. The information and opinions we provide in this section and across the Toolkit do not address your individual requirements and are for informational purposes only. They do not constitute any form of legal advice. We recommend that appropriate legal advice should be taken from a qualified solicitor before taking or refraining from taking any action.

Introduction

Community engagement is highly advisable for any project that aims to sell ecosystem services, to ensure fair outcomes for local communities and the long-term success of the project. Project developers can build connections with local stakeholder groups early on to spot both risks and opportunities.

Introduction

Project developers and enterprises will need to keep a continuous check on how current and future policy may affect the project, and also opportunities for the project to inform policy. The role of private finance for nature across the UK is being encouraged by the UK government and its devolved administrations, and new rules, standards and markets are being developed.

 

Acknowledgements

With many thanks for their time and insight on the project:

Louise Stratton, Development Manager, Poole Harbour Nutrient Management Scheme

 

 

Natalie Poulter, Dorset Catchment Partnerships Co-ordinator

 

 

Date published: 08/12/2022

Next Milestone

Project mandate

In July 2022, the Poole Harbour Nutrient Management Scheme officially received an ‘Approved Scheme’ status from the Environment Agency and Natural England to reduce agricultural nitrate pollution in the Poole Harbour catchment over the next two years. This means that other regulatory and legal measures, such as a Water Protection Zone (WPZ), will not be used to address the nitrate pollution in the catchment while the Scheme maintains its status. The EA and NE have approved the Scheme to help restore water quality in the catchment, following a Judicial Review in 2015 over Poole Harbour’s poor ecological state. The project has a unique mandate, as it was started to prevent a blanket regulation (WPZ) from being imposed, and to help Government meet its own legal obligations. This approval status comes after four years of project development.

Poole Harbour, located in Dorset, is one of the world’s largest natural harbours and is of key ecological significance both nationally and internationally. It has several protection statuses, including as a ‘Transitional and Coastal waterbody (TraC)’ under the European Water Framework Directive, a Site of Specific Scientific Interest (SSSI) and a Special Protected Area (SPA).

Despite this, water quality has significantly reduced over the last 50 years, with the amount of nitrogen entering the harbour having doubled from around 1,000 tonnes per year in the 1960s to 2,300 tonnes annually now [1]. Poole Harbour has repeatedly suffered from eutrophication whereby excessive nitrogen leads to algae blooms that reduce water clarity, kill aquatic life and block sunlight for vegetation.

In light of the failure to preserve this protected area, in 2015 the World Wide Fund for Nature (WWF), the Angling Trust and Fish Legal undertook a Judicial Review against the government. It required additional action from the Environment Agency and Natural England to restore Poole Harbour’s water quality, on the basis that these responsible bodies had not appeared to consider the use of Water Protection Zones (WPZs). WPZs would place blanket restrictions on all applicable sites within the catchment, such as the use of certain fertilizers and foodstuffs.

As a result of the Judicial Review, in 2018 the Environment Agency and Natural England wrote a draft Consent Order, which legally commits to a reduction in nutrient levels by 2030. It also estimated separate sources of nitrate and phosphorous pollution (run-off). It identified agriculture as the largest source of nitrate run-off and sets a legally binding target for farmers to reduce their average nutrient run-off to less than 18.1 kg of nitrogen per hectare, per year. Crucially, it provides the opportunity for farmers within an Approved Scheme to achieve this through a ‘glide path’ of reduction up to 2030. Farmers outside such a Scheme are required to meet the 18.1kgN/ha/yr target from 2023. It also explores a list of options for delivering on this, including the use of WPZs.

Scoping for the Scheme was first started by the NFU in 2018, when the Environment Agency passed this draft to the local NFU catchment team. Its task was to feed back on the agricultural targets and the feasibility of the options outlined in the report, along with explorations of any other alternatives. The Consent Order was officially published in 2021, inclusive of the NFU’s feedback and their concept development of the Scheme.

 

Early Concept Scoping

The Poole Harbour catchment itself covers 820km2 and has over 550 farm holdings of mixed farm types.

Louise Stratton, Development Manager of the Scheme and former NFU County Advisor, says that when NFU first discussed the draft Consent Order, it noted that the figures it uses were based on agricultural data from 20 years ago. Stratton comments that this initial lack of current data posed a serious challenge to the team in terms of forming a response to the draft Consent Order, and it decided to make updated and granular scientific modelling a core project principle going forward.

The next step was to work with relevant local partnerships to test some of the options they considered. The NFU approached the Poole Harbour Catchment Partnership, a Catchment Based Approach initiative that works at source to improve water quality and river function across the Catchment. As part of its work, the Partnership ran a sub-group focussing on Agriculture’s contributions to the nitrate run-off problem in the catchment, which involved farmers from across the catchment. The NFU explained the project’s mandate and also presented high level scenarios to be considered, including the implementation of a Water Protection Zone, and a voluntary market-based approach, where nutrient reduction outcomes could be traded between farmers to ‘balance’ the overall nutrient run-off across the catchment. Poole Harbour Catchment Partnership’s Agriculture sub-group agreed to pause its work while the voluntary market approach could be explored, and a small, core group of farmers formed to further develop the concept. The intention was that this group, later to become Poole Harbour Agriculture Group Community Interest Company (PHAG CIC), would be single-focused, farmer-led and have ownership of any scheme developed.

Having explored the NFU’s scenarios, the PHAG team responded best to the voluntary market approach, stating that this would leave more flexibility and room for ambition in nutrient reduction, rather than every farm keeping to one uniform limit. They also favoured nature-based solutions over any grey infrastructure options for achieving this, as these would give wider environmental benefits to the area and help prepare farmers for other forms of environmental market trading, such as carbon and biodiversity credits. Based on this feedback, it was decided that a ‘catchment nutrient balancing approach’ would be taken, where farmers more able to reduce their run off and volatisation losses would trade spare ‘capacity’ with farmers less able.

Another core project principle would be that the Scheme would be ‘for farmers, by farmers’. With this in mind, the farmer representation and involvement at every level of project development was built in, particularly at the Steering Group level. Due to the scale of the problem that it was trying to address and the potential to deliver financial benefits, the project team decided to design the Scheme so that as many farmers as possible could take part

It is worth noting that in addition to farmers, the Steering Group has been composed of a number of key organisations including Wessex Water, Natural England, the Environment Agency, the NFU and the Catchment Partnership, right through to the Approved Scheme being signed off – this has been an important part of getting a scheme that is fit for purpose not just for farmers, but making sure it is credible for the other partners involved too. Now this milestone has been hit, the Steering Group responsibility has been passed to the PHAG directors.

 

Potential to attract private finance

As a revenue model, the project team agreed to the concept of ‘credits’ to represent the excess nitrate reduction that farmers could trade between themselves. This seemed the most suitable option to support a market-based and voluntary approach. It could also be aligned with the Consent Order’s nitrogen targets, which could be used to set the credits’ unit of measurement.

The concept of trading nitrate credits is similar to carbon and biodiversity credit schemes. This gave an indication of the market infrastructure the Scheme would need, and helped to establish what lifetime costs the Scheme would face. This includes the administrative fees of running a single registry of credits, the management of legal contracts, and any monitoring and verification of the farmers’ nitrate reduction plans. However, it realised that extensive processes, tools and resources would be needed to support the Scheme and that this would likely take several years to develop.

To build on the concept of nitrate credits delivered by farmers, the project team looked at previous examples. It found that there were no such examples in the UK. However, it did speak with international project teams, such as the Chesapeake Bay water quality programme in the USA, which also takes a catchment nutrient balancing approach, and a data company called Overseer in New Zealand, which produces nutrient plans for individual farms, to try and find common processes to use.

The main beneficiaries of the Scheme are farmers who cannot meet their nitrate reduction targets. Though prices of credits have not yet been established, the project team wanted to establish farmer buy-in early on, due to the novel approach of the project. The team first did this by testing the concept with the PHAG farmer group, and then going out to farmers catchment-wide in 2018, who indicated a strong willingness to explore the scheme (more detail on this can be found in Milestone 2).

Other potential buyer groups identified were local water companies, which also had nutrient targets in the Consent Order. Wessex Water, the only water company in the catchment, demonstrated willingness to explore the scheme by having a representative join the project team in early scoping, contributing catchment data and sharing experiences of on-farm interventions and nutrient trading. The company’s motivation is to keep financial and carbon costs down by working with farmers to reduce nitrate levels, rather than building expensive and energy-intensive systems at its treatment works.

Property developers were a third buyer group identified in the catchment, which may be able to purchase the Scheme’s credits in order to meet the ‘nutrient neutrality’ requirements for every site they develop. There is an emerging market for nutrient credits (both nitrate and phosphate) sold to property developers for between £2,000-3,000 per kilo of nitrogen (as of 01/09/2022). The project team met with the local planning authority of Dorset Council, one of two unitary councils in the area, which would approve the developers’ use of the credits. They discussed the feasibility of involving this buyer group and agreed that there was potential of including developers as such.

 

Legal feasibility

The main legal challenge of concern to the project team was the threat of a Water Protection Zone (WPZ) eventually being set up in the catchment. If the Environment Agency decided to implement a WPZ in its final Consent Order, then the Scheme would have no legal additionality and become redundant, as farmers across the catchment would be forced to reduce their nitrate emissions anyway. The market-based approach would only be of value if the Environment Agency ‘approved’ of this Scheme and assured the catchment that WPZs would not be used now or in the future. This challenge was identified at the start of the project scoping, and so the project team included a representative of the Environment Agency (EA) to address this and build a case for the EA choosing the Scheme over the WPZ approach. In 2022, the EA formally approved the Scheme and has stated that they will not be proceeding with a WPZ if the Scheme is successful. Farmers who participate in the Scheme can benefit from this trading approach that takes the overall level of nitrate run-off on a ‘glide path’ of reduction up to 2030, whereas those who choose not to participate in the Scheme will face a fixed nitrate target immediately (enforced from 2023) and be excluded from the option of buying or selling nitrate reduction outcomes through the Scheme. The intention is that the Scheme is the sole platform for nutrient balancing/trading in the catchment, but there is legally nothing to stop a farmer outside the scheme selling credits elsewhere.

 

Project Development Funding

For the months after the NFU received the draft Consent Order, the only resource required by the project was time to explore the concept. Conversations were first led by the NFU with external partners, such as the EA, Wessex Water and the farmers of the Catchment Partnership’s Agriculture Sub-group. All of these parties committed more of their time as the concept progressed.

After this time, the team had identified several costs to fully develop the project. For example, a robust, accurate and easy to use nutrient accounting tool would need to be developed to baseline every farmer’s nitrate run-off and set targets based on specific interventions they planned to use.

To cover these costs, the project team decided to seek external funding. The EA had informed the project team that it was creating a funding programme with the Esmée Fairbairn Foundation and Defra for UK-based projects that were aiming to deliver nature outcomes with private finance, specifically those at the development phase. Triodos Bank was also involved as an advisor and evaluator of potential projects.

The project team then spent around eight months developing a funding bid to take to Esmée Fairbairn Foundation. Stratton says the application process has involved considerable work by all concerned, and has taken much longer than anticipated, with many detailed questions posed by the Foundation since submission in September 2019. In June 2020, it officially secured £145,000 in grant funding.

Originally, only one pilot was intended. As the project team unpacked the complexities of the Scheme’s necessary processes, however, it became clear it needed to test some basics with a small group, and then do a fuller pilot later on. The funding was intended for the first pilot only. However, as the project evolved and external timescales changed, funders agreed that funds could be rolled on to incorporate the second (larger) pilot. This funding supported the development of the first versions of the NLT, the trading processes, and some money to develop a website and communications strategy for all farmers and other stakeholders in the catchment. The funding also paid for Triodos Bank which were contracted by the project to provide an advisor short term to develop the business plan and financial model.

The team at Poole Harbour shared that the flexibility by the funders to be able try new things had been vital to achieving the end goal.

 

Lessons Learned

Natalie Poulter, Dorset Catchment Partnerships Co-ordinator, shares that the project, due to its innovative nature, has come with multiple learnings, not least understanding how long it would take to develop.

“Synchronising a complex farming year across a number of different farming systems (so as to reach farmers at the right time for them to have capacity for involvement, and/or at the right time for planning ahead) with a regulatory system that moves slowly is not easy,” says Poulter.

“Figuring out what approaches will work, ironing out details, developing a Scheme clause by clause has been absolutely necessary to result in a scheme which is truly innovative, well-supported across the sector and by its regulators and, importantly, will work,” she says. “Doing so with minimal dedicated time (one full-time officer) has relied on a huge amount of in-kind support from partner organisations. If we did this again, more funded staff time would be a must.”

Finally, Poulter says that the vital component that underpins a successful trading scheme of any kind is the commodity accounting tool – in this case, the nutrient accounting tool, which is robust, user-friendly, clear, supported and updated, accredited etc. and future-proofed (so that it could calculate phosphate, carbon and biodiversity credits as well as nitrate from a single set of data entry). “This unicorn does not yet exist. We have the next best thing, but again this has relied on vast amounts of good will, in-kind support and acceptance of its limitations,” says Poulter. She points to the need for Government investment in a commercially-managed tool that is fit for purpose for the agricultural sector so it can understand its options for delivering natural capital goods.